Finance and the Securities Market Exploring Business Chapter 13 Tuesday 9/13/11.

Finance and the Finance and the Securities MarketSecurities Market

Exploring BusinessChapter 13

Tuesday 9/13/11

Developing A Financial PlanDeveloping A Financial Plan

Establish a Business Plan, Marketing Plan, and Establish a Business Plan, Marketing Plan, and Financial PlanFinancial Plan

Calculate Funds NeededCalculate Funds Needed

Do a “Pro Forma” Profitability Analysis & Cash Flow Do a “Pro Forma” Profitability Analysis & Cash Flow

Estimate SalesEstimate Sales

Project CostsProject Costs

Getting The MoneyGetting The Money

OwnerOwner’’s Personal Assetss Personal Assets

Loans- Family/FriendsLoans- Family/Friends

Bank LoansBank Loans

Making The Financing DecisionMaking The Financing Decision

Capital Budgeting and Financial PlanningCapital Budgeting and Financial Planning

• Capital budgeting is the process of analyzing the needs of business and selecting the assets that will maximize its value– Assessing risk

• Every investment in capital assets has its own risk

Qualitative Assessment of Capital Qualitative Assessment of Capital Budgeting RiskBudgeting Risk

Introduce a New Product in Foreign Markets (risk depends on stability of country)

Expand into a New Market

Introduce a New Product in a Familiar Area

Add to a Product Line

Buy New Equipment foran Established Market

Repair Old Machinery

Highest Risk

Lowest Risk

Where SmallWhere Small& Start-up Businesses Get Funding& Start-up Businesses Get Funding

Exploring Business © 2009 FlatWorld Knowledge

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Loan CharacteristicsLoan Characteristics

1)1) MaturityMaturity• Short-Term, Intermediate, Long-TermShort-Term, Intermediate, Long-Term• Line of CreditLine of Credit• AmortizationAmortization

2)2) SecuritySecurity• CollateralCollateral• UnsecuredUnsecured

3)3) InterestInterest

Pro Forma Income Statement Year 1 – By Month

Pro Forma Income Statement Year 1 Through Year 5

Pro Forma Balance SheetYear 1 - By Month

Pro Forma Balance Sheet Year 1 Through Year 5

Pro Forma Cash Flow StatementYear 1 - By Month

Pro Forma Cash Flow StatementYear 1 Through Year 5

Users OfUsers OfFinancial InformationFinancial Information

Owners &Owners &ManagersManagers

Investors & Investors & CreditorsCreditors


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Growth Stage FinancingGrowth Stage Financing

Managing Managing

• Cash FlowCash Flow

• Accounts ReceivableAccounts Receivable

• Accounts Payable- Trade CreditAccounts Payable- Trade Credit

Budgeting- financial planBudgeting- financial plan

• CashCash

• CapitalCapital

Managing Company ResourcesUsing Financial Information

1) Revenue Sales [marketing, pricing strategies] Returns [quality control]

2) COGS Direct Labor Cost & Utilization [Payroll balance,

OT, Flextime, etc.] Production Capacity

3) Expenses

From the Income Statement:

Understanding the Interrelationships between Understanding the Interrelationships between Internal & External Pricing Strategies and Internal & External Pricing Strategies and SalesSales

Managing the Interrelationships between Managing the Interrelationships between Internal & External Factors Affecting PricingInternal & External Factors Affecting Pricing

Implementing Pricing Strategies Implementing Pricing Strategies to Effect to Effect SalesSales

Managing Direct Payroll Costs

Payroll: Incorporating balance between cash used for payroll and cash flow. Pay bi-monthly,

26 pay periods per year, etc.

How: Keeping Payroll In-house Outsourcing Payroll Outsourcing Employees & Payroll Utilizing Contingent Workforce

Managing Direct Costs UtilizationManaging Direct Costs Utilization

• Having a Handle on Production Capacity

• Analyzing trade-offs between manpower experience vs. cost

• Effective manpower utilization - when & where to implement– OT– Flextime– Other incentives

Managing Managing ExpensesExpenses

From the Balance Sheet

Current assets are short-term resources CashInvestmentsAccounts receivable Inventory

Current liabilities are short-term debtsAccounts payableAccrued salariesAccrued taxesShort-term bank loans

Managing Company Current ResourcesUsing Financial Information

• Marketable securities• US Treasury bills (T-bills)• Commercial certificates of deposit

(CDs)• Commercial paper• International investments – the

Eurodollar market

Managing Current Assets Investing Idle Cash

Managing Current AssetsInventory and A/R

Inventory - The objective is to maximize inventory investment without production cutbacks because of materials shortfalls or lost sales due to insufficient finished goods inventories

Putting as much time between A/P and A/R to conserve cash Incorporating JIT Spreading supply risk over several suppliers

Accounts Receivable Putting as little time between Invoicing and A/R to speed up cash inflow

Managing Current Assets –Managing Current Assets –Accounts ReceivableAccounts Receivable

• Each credit sale represents an account receivable--money owed to a business by credit customers

• General

– Typical- due within 30 days

Net 30

• Incentives

– 2% discount off invoice if paid between within 10 days of invoice date. Otherwise, Net 30 days due.

2% 10 Net 30

• Late Fee

– 1.5% per month [18% APR] penalty charged if invoice is paid late

Managing Long-Term Assets Using Managing Long-Term Assets Using Financial InformationFinancial Information

• Long-term (fixed) assets:– Plant– Offices– Equipment– Heavy machinery– Automobiles

Managing Current Liabilities –Managing Current Liabilities –Accounts PayableAccounts Payable

Accounts Payable - Taking every advantage of trade discounts offered by most suppliers

Staff Salaries - Analyzing trade-offs between manpower experience vs. cost

Short-term Loans – Utiilizing the most cost-effective financial resources available.

Managing Long-Term LiabilitiesManaging Long-Term Liabilities

• Long-term Debt: Debts that will be repaid over a number of years– Long-term loans– Bond issues

The Securities MarketThe Securities Market

Equities

Common Stock

Preferred Stock

Warrants, Rights, ADRs

Retained Earnings

Debt

Corporate Debt

U.S. Government Debt

Muni Debt

Money Market

Euro Dollar Debt

Equity SecuritiesEquity SecuritiesCommon StockCommon Stock

”Owner” of a corporationStockholder Rights:

Right to Vote for Board of Directors Approve any Board decision that might dilute their equity

position [stock splits, reverse stock splits, issuance of convertible bonds or preferred stock, issue stock options.

Last in line during liquidationBoard Actions not requiring a Stockholder Vote :

Declaration of cash or stock dividends, rights (to buy more shares) distributions and repurchase of shares for its Treasury

May or may not get dividend – up to the Board

Equity SecuritiesEquity SecuritiesCommon StockCommon Stock

• Purchase stock through Broker/Dealers [Merrill Lynch, Charles Schwab, etc.]

• New offerings [IPOs] • Trade for existing shares

Equity SecuritiesEquity SecuritiesSpecial SecuritiesSpecial Securities

• Rights– Short-term option to buy stock at a fixed price.

Typically issued for 30 to 60 days and then expire. Issued under an offering of new commonshares to existing shareholders.

• Warrants (trade separately from underlying stock)– Long-term option to buy stock at a fixed price.

Typically attached to the sale of a new stock or bond issue as a “sweetener” to make it more attractive. Typical expirations are 5 years.

Issued Common StockIssued Common Stock

Equity SecuritiesEquity SecuritiesPreferred StockPreferred Stock

• Typically issued with $100 par value with a stated fixed dividend rate. For example, a company issues $100 par at 10% preferred stock. Preferred dividends (if declared by the Board) are paid semi-annually, with each dividend payment = $5 per share.

• Preferred differs from Common in that it pays a fixed dividend rate over its life

• Preferred stockholders are paid dividends ahead of common stock holders. Dividends are not guaranteed in any one year

Equity SecuritiesEquity SecuritiesPreferred StockPreferred Stock

Preferred stock acts more like bonds – their market value is influenced by interest rate moves.

Preferred stockholders have no voting rights or preemptive rights. Have features similar to bonds.

Theoretical Market price = Annual Dividend Income/

Market Yield$100 = $10 / 10%

Debt SecuritiesDebt SecuritiesBondsBonds

• A bond is a debt security that obligates the issuer to pay interest [usually semi-annually] and to the repay principal when the debt matures (at a set date)

• Bonds are issued with a stated par value (usually $1,000 minimum) and a stated rate of interest (the “Nominal” or “Coupon” rate which never changes) on the debt. For example, a $1,000 par value bond is issued with a stated coupon rate of 8% by XYZ Corporation in 2011. The maturity on the debt is 2031 (20 years). XYZ Corp must pay $80 of interest annually to the bondholder for each of the 20 years the bond is outstanding.

• Bondholders are ahead of Preferred stockholders and Common stockholders if a company liquidates.

Corporate and U.S. Government DebtCorporate and U.S. Government Debt

Corporate Debt – Corporations issue debt in order to raise capital. The debt can take the form of long-term bonds, intermediate-term bonds, or short-term notes known as commercial paper.

U.S. Government Debt – The U.S. Government issues debt in order to raise finance the running of the government. Negotiable debt issues can be long-term bonds, intermediate term notes, and short-term notes known as Treasury Bills.

Muni DebtMuni Debt

Muni Debt – Municipal Bonds are debt issues of state and local governments, territories and political subdivisions (such as special districts, agencies and authorities). One special feature of most Muni bonds is the Fed. interest exemption.

After-Tax Return – When comparing competing investments (like a Corporate Bond yielding 5% vs a Muni Bond at 4% tax exempt), one must look at a person’s Federal tax bracket to get an “equivalent yield”. In this case, if a person were in a 25% tax bracket, you would divide the 4% by 100% - 25%, i.e, .04/.75 = 5.3%. The muni bond would be a better choice

Types and Financing: General Obligation bonds [ad valorem taxes] Revenue Bonds [self-supporting] Special Assessment, Moral Obligation & Special Tax bonds

Money Market DebtMoney Market Debt

Money Market – A debt obligation that matures in one year or less. Very liquid. Used by the FED for open market operations [buying and selling money market instruments], to loosen or tighten credit.

Some Types: Treasury bills Treasury notes Commercial paper Bankers’ Acceptance Time drafts Negotiable CDs

Debt Outside the U.S. - Debt Outside the U.S. - Euro Bond MarketEuro Bond Market

• EuroBond Market: Centered in London, the market is larger than the U.S. Corporate bond market.

• Provides a huge competitive market for US corporations, U.S. , state and local governments, foreign coporations, and other soverign governments.

• What makes them attractive are:– No currency exchange risk– Low interest rates– Lower issuance expense

• Bonds are denominated in U.S. dollars or foreign currencies (Euro, British pound)


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Securities MarketsSecurities Markets

o MarketsMarkets

• PrimaryPrimary – new issues being sold to public for first time – new issues being sold to public for first time

• SecondarySecondary – trading of issued securities – trading of issued securities

o Organized ExchangesOrganized Exchanges

• New York & Regional Stock Exchanges [3,000 listed New York & Regional Stock Exchanges [3,000 listed companiescompanies

• NASDAQ [ 3,200 companies traded]NASDAQ [ 3,200 companies traded]

• Over-The-Counter [> 10,000 companies traded]Over-The-Counter [> 10,000 companies traded]


13-42MeasuringMeasuringMarket PerformanceMarket Performance

Market IndexesMarket Indexes• Dow Jones Industrial AveraDow Jones Industrial Average – 30 large diverse ge – 30 large diverse

issues, mostly NYSE listed, that mirror US issues, mostly NYSE listed, that mirror US economyeconomy

• NASDAQ CompositeNASDAQ Composite sampling of NASDAQ issues sampling of NASDAQ issues• S & P 500S & P 500 consists of 500 or largest US consists of 500 or largest US

corporations in UScorporations in US• Specialty Indexes Specialty Indexes

•Wilshire, Russell 2000, Value Line, etc.Wilshire, Russell 2000, Value Line, etc.

Reading a Stock ListingReading a Stock Listing

Bull vs. Bear MarketBull vs. Bear Market

The 30 Stocks in the Dow Jones Industrial Average

Analysis ToolsAnalysis Tools

Fundamentals Analysis - An analysis of a prospective company’s income and balance sheet statements in order to forecast anticipated stock movements based on historical records of assets, earnings, sales, products, management and markets.

1) Appraisal of company’s prospects2) Assessment of whether a stock or group of stocks is undervalued or overvalued at current market prices3) Not concerned with stock price and volume movements

Analysis ToolsAnalysis Tools

Technical Analysis – Looks at the demand and supply for a stock or group of stocks based on trading volume and prices.

1)Not concerned with financial condition of company

2)Use charts and computer programs to identify and project price trends.

Types of Investment RiskTypes of Investment Risk

Business Risk – associated with specific securities, not whole market.

Market [“systemic”] Risk – investment risk that can’t be avoided even by diversification. Tied to economy as a whole.

Interest Rate Risk – affects the market price of fixed-income securities [bonds, preferred stock], whose price movements are affected by interst rate movements.

Inflation [“purchasing power”] Risk – risk that invested capital will decline in value due to inflation, or won’t keep pace with inflation.

Regulatory Risk – investments affected by tax law changes

Liquidity Risk – some investments face additional risk because no secondary market is available to quickly sell security without taking a loss.

Assessing Investment Needs:Evaluating Stocks for Return vs. Risk

Safety Corporate – Blue chip stocks US Gov’t Securities – highest ratings

Growth & Emerging Growth Companies in a growth period due to rapid market expansion or unique products New ventures – high risk/ potentially high reward. Earnings are typically plowed back into the company, rather than distributed

Income Mature companies with high dividend payout ratios

Defensive – companies remain unaffected during business cyclesSpeculative – feast or famine type companiesSpecial Situations – Companies going through take-overs, restructuring, etc.

Portfolio Management Strategies

Strategic Asset Allocation – investment strategy that allocatesFunds between appropriate asset classes [i.e., investments with similar risk & return characteristics]. Example, corporate, government and muni bonds are an asset class.

Tactical Asset Allocation – an investment strategy that engagesIn market timing in an attempt to “beat the market”. Deviations from the normal asset mix are made in response to perceivedchanging market opportunities.

Assessment methods include reliance on business cycle analysisand economic forecasting.


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Stock Listing for Hershey FoodsStock Listing for Hershey Foods

Bid & Ask: If Hershey is quoted at 37.00 Bid and 37.50 Ask,the dealer is offering HSY stock at 37.50 to any buyer,and is willing to buy HSY stock at 37.00 from any seller.The difference in the Bid and Ask is the spread, or theDealer’s gross profit margin.


13-50Interpreting AInterpreting AStock QuotationStock Quotation

TermTerm ExplanationExplanation

52-Week HI52-Week HI Highest price in last yearHighest price in last year

52-Week LO52-Week LO Lowest price in last yearLowest price in last year

Stock Stock (Symbol)(Symbol) Symbol of listingSymbol of listing

DIVDIV Annual dividend per shareAnnual dividend per share

YLD %YLD % D/E yield on closing priceD/E yield on closing price

PEPE Investors pay on $1 earningsInvestors pay on $1 earnings

VOLVOL Volume of shares tradedVolume of shares traded

CloseClose Price at close of business dayPrice at close of business day

Valuation Ratios

Price/Earnings Ratio – calculated by dividing the current marketprice of a stock by its earnings per share. For example, a stock With a current market price of $20 and annual earnings per share

It’s also known as the “multiple” and is an indication of how muchan investor is paying for a company’s earning power. The higherthe P/E, the more investors paying for the expectation of earningsgrowth.

of $2, has a P/E ratio of 10. The stock is currently selling at 10 times earnings.

Earnings per Share – Annual earnings divided by the number of outstanding shares.

1. Select an article that is relevant to the topics being covered in the class. Be sure to choose only articles that are written in the "real" business press: no blogs, no web search results. Look in the business section of local newspapers, weekly news magazines, or business dailies and weeklies.

2. Include you name, date, and course/section number, and a title.

3. Write just three paragraphs:Article title, author, publication, date, and relevance to course topic.Summary in your own words of what the article discussed.Your thoughts about the subject.

Paragraphs are made up of sentences, and papers should be written in business English, printed (no handwritten submissions!), and turned in during class on the day they are due.

Plagiarism is just wrong, and you'll get an F on the assignment the first time. Second time, you'll be dropped from the class. If you don't know what plagiarism is, FIND OUT! DueThursday 9/15/11

Bus 20 Class Tuesday 9/13/11Article 1 Assignment

Finance and the Securities Market Exploring Business Chapter 13 Tuesday 9/13/11.

Documents

Transcript of Finance and the Securities Market Exploring Business Chapter 13 Tuesday 9/13/11.