June 2023

Capital
Markets-
Fundamentals
and Ethiopian
Legal
Framework
ADAMA, ETHIOPIA
 Learning Solutions

Finance & Business

Solutions
Business Development
Services

Established in 2015 Training & Consulting

Services

Provides Business Certified by Ethiopian

Solutions Management Institute
 # of Employees # professionals we
trained

>30 >3000

# of IFRS # of IPSAS
Conversion projects Conversion projects # of Valuation
completed completed works completed

>100 >20 > 50

 Business Asset and
Capital Managed Development
IFRS/IPSAS Business
Markets Services Services Valuation
 Pakistan
UK SKANS School of Accountancy
UK

London School of Business & Finance

Sliver Learning Partner of ACCA
UAE

Kenya Governance Dynamics

UAE and the Middle East
Minet Group
Partners Mauritius
Lifetime Learning and
Consulting
 AYELE KEBEDE, MSc, CMSA, DipIFR

EXPERIENCE PROFESSIONAL MEMBERSHIP

Over 20 years of experience • IABFM (International Academy of
• Academics Business and Financial
• Training Management)
• Finance and Business Consulting

OTHER
• Board Member of
• Ethio-Engineering Group
• Ethiopian Construction Works
Corporation
• AMCE Automotive
• Over 50 IFRS and IPSAS Projects
CERTIFICATIONS
• DipIFR- ACCA, UK
• DIPSAS- CIPFA, UK OTHER
• Cert ISA- ICAEW, UK
• CMSA - CFI, Canada
• FMVA- CFI- Canada

6
 YONAS ESTIFANOS, FCCA, MCSI, MBA
EXPERIENCE
Over 20 years of experience
• Academics
• Training
• Finance and Business Consulting
OTHER
• Over 50 IFRS and IPSAS Projects
• Approved Mentor ( Oxford
Brookes University, UK)
• Chairperson- ACCA Ethiopia
Members Network and IA delegate
PROFESSIONAL MEMBERSHIP
• Fellow of the Association of
Chartered Accountants (FCCA) UK.
• Member of Chartered Institute of
Securities and Investment (MCSI)
UK
CERTIFICATIONS
• DipIFR- ACCA, UK
• DIPSAS- CIPFA, UK OTHER
• Cert ISA- ICAEW, UK
• Insolvency Practitioner- Ethiopia
7
 About the Training

Ethiopian Capital
Market &
Capital Accountants’ role
Financial Markets &
Institutions Operations
Financial
Financial Markets
System
 About the Training

Day 1
Financial Systems,
Financial Markets
and Intermediaries

Day 2
Capital Markets and
Operations

Day 3
Ethiopian Capital
Market and role of
accountants
Introduction to the Financial System
 Financial System

a system that brings savers and matches the needs of savers

borrowers in an economy directly or directly through financial markets
indirectly. or indirectly through financial
. institutions.
 Indirect Finance

Financial
Funds Intermediaries Funds

Funds
Lender-Savers Borrower-Spenders
- Households - Households
- Business Firms Financial Markets - Business Firms
Funds Funds
- Government - Government

Direct Finance
Financial Markets
 A mechanism where savers and borrowers
transact directly by exchanging securities
with money

Financial channel funds from savers who have surplus

funds to those who have shortage of funds.
Markets

Securities are claims on the borrower’s

future income or assets, such as stock,
bonds.
 Functions of Financial Markets

1 Efficiency 4 Risk Sharing

2 Price Determination 5
Liquidity

3 Borrowing & Lending

6
Coordination & Provision
of Information
Financial Market Structure Debt Vs Equity

Primary Vs Secondary

Exchange Vs OTC
Markets

Money Vs Capital

Cash Vs Derivative
 Debt vs Equity Market
DEBT MARKET
ü Debt Claims are the most commonly traded
security.
ü The issuer of the security (borrower) receives funds
and the holder (lender) subsequently receives a
fixed amount of payments over a specified period
of time (Maturity)
ü Debt Securities can be short-term (maturity < 1
year), intermediate or long-term (maturity > 10
years)
ü The holder does not achieve ownership of the
issuing enterprise
ü Examples are treasury bills, bonds, or mortgages.
EQUITY MARKET
ü The most common equity security is stock or share
ü Equity security makes the buyer the owner of the
issuer’s enterprise.
ü Equity securities entitle the holder to earn
dividends and are held primarily to be sold and
resold
ü Equity titles do not expire and their maturity is
indefinite. Hence they are considered long-term
securities.
 EXCHANGE OTC

Securities are traded in securities are sold with

a central location such out an organized
as Stock Exchange. trading location.
 MONEY CAPITAL
MARKET MARKET

markets in which only markets in which longer

short-term securities are term debt securities are
traded traded.
 Capital Market Instruments

Equity Shares Debt Securities

Derivatives

Mutual Funds Exchange Traded Funds

 Money Market Instruments

Bankers Acceptance Treasury Bill

The

Commercial Paper
picture
can't

Certificate of Deposit
be
display
ed.

Repurchase Agreement
 CASH DERIVATIVE
MARKET MARKET

market for immediate market for the delivery

delivery of and payment of and payment for
for commodity or commodity of financial
financial instrument instrument will be made
in the future
 Types of Derivatives

Forward Contracts

Call Option

Derivatives Options

Put Option

Swaps
Financial Institutions
 are financial
intermediaries that
intermediate between match the needs of
savers and borrowers. savers and borrowers
indirectly through
intermediation- called
Financial asset transformation
Institutions
buy asset from borrows-
usually a long term loan
contract & sell a different
financial asset to savers-
usually a highly liquid short-
run claim
are primary source of
funding for business.
 Functions of Financial Institutions

Lower Reduce Asymmetric

Reduce Risk
Transaction Cost Information

Economies of Scale Risk Sharing

Liquidity Service Diversification

 Categories of Financial
Institutions

Depository Contractual Saving Investment

Institutions Institution Intermediaries

accept deposits from acquire funds at serve different forms of

savers and transform periodic intervals on a finance
them into loans contractual basis

Commercial Banks, Insurance companies, Investment Banks,

Credit Associations Pension Funds Mutual Funds

28
Valuation of Securities
 Analysis of Economic
Awareness Conditions
Write your
Allocate amounts available
paragraph here to different
countries and different securities
Three-Step
Valuation Process
Analysis of Industries
E-I-C Approach
Classify industries as growth,
matured, and allocate funds

Analysis of Securities

Estimation of Cashflow and

value
 - Tax Cuts/Increase
Fiscal Policy
- Increase/decrease in
government spending
(Affects spending)

Monetary Policy
Macro - Restrictive monetary
Economic Economy Affects the supply &
policy

Analysis
cost of funds

- Political Uncertainty
Other - War
Factors - Balance of payment crisis
- Forex problems
- Monetary devaluation
 Return Elements Risk Elements

Demand Analysis Buyer & Supplier

Power

Industry Competitive Rivalry Intensity

Advantage
Analysis

Competition Substitute
Structure

Life Cycle New Entrant

 Historical Future
Performance Prospects
Company
Analysis
Firm Standing in
the industry
 How would you assess the country's economic outlook in the forthcoming year?
Give three important reasons for you to believe the economy will show good
(bad) performance in the next year.

_______________________________________________________________

_______________________________________________________________
Exercise
_______________________________________________________________

_______________________________________________________________

_______________________________________________________________

_______________________________________________________________
 On a three-point scale (1=Good, 2=Average, and 3= Poor), how would you
rate the outlook of the following industries for the coming year?

1. Construction Industry
Exercise 2. Pharmaceutical Industry
3. Tourism Industry
4. Software Industry
5. Manufacturing Industry
 Valuation of Securities

Valuation is the analytical process of Value of an asset is equal to

determining the current (or projected) present value of its expected
worth of an asset or a company returns. This concept also applies
. to valuation of securities.
 Valuation of Fixed Income Securities

Debt securities issued by The coupon interest payments,

governments and business and the principal repayments are
organizations are fixed income The intrinsic value of a bond or known and the present value is
securities. debenture is the present value of determined by discounting these

its expected cash flows. future payments at an appropriate

Bonds and Debentures are the
discount rate or market yield
most common examples
Valuation of Debt Securities
 The price of a bond is the sum of the
discounted future cash flow

Valuation A discount rate is a rate used to determine the price

of the bond. Such a rate is determined by the market
of and affected by perceived risk

Bonds
An inverse relationship between price and yield

As discount rates increase the price falls.

 Valuation of Bonds

Interest Rate Credit Ratings

e.g Moody’s, S&P

The rate that provides an

acceptable return commensurate What affects
with the issuer’s risk. bond Price

Coupon and
Economic Environment
Maturity

The rate written in the terms of the

bond indenture.
 Valuation of Bonds

Obtain regulatory
Arrange for underwriters approval of the bond Have bond
issue, undergo audits, certificates printed
and issue a prospectus

The issuance process often takes weeks or months

 Valuation of Bonds

Market Interest Rate Bond Sold at

6% Premium

8% Par Value

10% Discount
 Bonds Issued at Par, Discount, and Premium

Addis Factory issues 100,000 in bonds dated January 1, 2021, due in five
years with 9 percent interest payable annually on January 1. At the time of
issue, the market rate for such bonds is
Exercise Case 1, 9 percent,

Case 2, 8 percent and

Case 3 11 percent.

Required: Compute the price of the Bond

 Valuation of Shares

Return on
Capital
Employed
Method
Asset
Backing Fair Price-
Method Value Method Earning
Ratio
Yield-Basis Method
Method
 Also called Intrinsic Value Method or Real Value Basis method

The shares are valued on the basis of the real internal value of the assets.

Asset Backing This method may be made either:

• On a going/continuing concern basis: Consider the utility of the assets
Method
• Break-up value basis.: Consider the net realizable value

Intrinsic Value of Funds available for equity shareholders

each share Number of equity shares
 Also called Profit Basis/Income Basis Method; Earning Capacity Method

Yield is the effective rate of return on investments which is invested by the

investors.
Yield-Basis Under the Yield-Basis method, the valuation of shares is made on the;
(i) Profit Basis;
Method (ii) Dividend Basis.

Valuation of shares may be made either

(a) on the basis of total amount of dividend, or
(b) on the basis of percentage or rate of dividend
Yield-Basis
Method

47
 This method is the mean of Asset-Backing Method and Yield-Basis Method
Fair
Value
Method
Intrinsic Value + Yield Value
Fair Value
2
 Valuation of shares is made on the basis of the rate of a return (after tax)
Return on on capital employed

Capital
Employed
Value Paid up
Method of
Rate of Return on Capital Employed
Value of
Shares Market Rate of Expected Returns shares
 This is the ratio which relates the market price of the share to earnings
per equity share

Market Price of the shares (MPS)

Price-Earning
Ratio Earnings per share (EPS)

Price-Earning
Using the P/E ratio we can ascertain the value of shares and the value of businesses
Ratio with the help of the following formula:
Method
Value
Price Per Share EPS
per
Share Earning Per Share

Value
Price Per Share Total
of
Business Earning Per Share Earnings