QCF MASTER 2011-2012

FUNDAMENTAL & TECHNICAL ANALYSIS

NGUYEN QUANG JVN 2011

COURSE OUTLINE
Objective: give an analytic method for valuing a corporate (fundamental analysis) and forecast short-term stock price change (technical analysis) 1st week: FA; 2nd week: TA Project: choose FA or TA (valuing a company or writing an automatic backtesting/trading system) Exam: Jan/2012
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COURSE OUTLINE
Thought we suppose that stock price is a random variable, we will "try" somehow to predict it (statistically) What may change the stock price of ABC be tomorrow, next month, next year?

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? ? ? ?
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VNM

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VNM

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COURSE OUTLINE
What may change the stock price of ABC be tomorrow, next month, next year, next five year,...?
? ? ? ?

Categorize them into: fundamental and technical reasons

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FA schedule
Monday morning: Introduction, Financial statements; afternoon: exercise Tuesday morning: Financial Analysis Wednesday morning: Valuation afternoon: exercise Thursday morning: Project Friday morning: Cost of capital, NPV, IRR, EAV afternoon: external seminar
Textbook: Fundamentals of Corporate Finance 3rd, by Richard A. Brealey, Stewart C. Myers and Alan J. Marcus 11/14/2011
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1st class schedule

Chapter 1
Corporate Financial Institutions & Markets

Chapter 2 (reading)
Time value of money

Chapter 3
Financial plan Financial statements

Exercise
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Organizing a Business (1)

Sole proprietorships Partnerships Corporations

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Organizing a Business (2)

Sole proprietorships
Start your own business, You bear all the costs and keep all the profits Easy to be established and the lack of regulations governing it. You are responsible for all the businesss debts and other liabilities. If the business borrows from the bank and subsequently cannot repay the loan, the bank has a claim against your personal belongings. It could force you into personal bankruptcy if the business debts are big enough. Thus as sole proprietor you have unlimited liability.

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Organizing a Business (3)

Partnerships
pool money and expertise with friends or business associates Your partnership agreement will set out how management decisions are to be made and the proportion of the profits to which each partner is entitled. Partners, like sole proprietors, have the disadvantage of unlimited liability. Many professional businesses are organized as partnerships. (large accounting, legal, and management consulting firms,...) Most large investment banks such as Morgan Stanley, Salomon, Smith Barney, Merrill Lynch, and Goldman Sachs started life as partnerships. So did many well-known companies, such as Microsoft and Apple Computer. But eventually these companies and their financing requirements grew too large for them to continue as partnerships.
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Organizing a Business (4)

Corporations
As your business grows, you may decide to incorporate Unlike a proprietorship or partnership, a corporation is legally distinct from its owners, who are not personally liable for the businesss liabilities. They have limited liability. Stockholders of a corporation own the firm, they elect a board of directors, which in turn appoints the top managers. The separation between management and ownership gives a corporation more flexibility and permanence than a partnership Similarly, todays shareholders may sell all their shares to new investors without affecting the business. By organizing as a corporation, a business may be able to attract a wide variety of investors.
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Organizing a Business (5)

Corporations
Management complex Tax disadvantage If shares (hold by a small group) are not publicly traded and your company is closely held. If shares are widely traded, such corporations are known as public companies

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Financial Managers (1)

Real assets
Assets used to produce goods and services. Tangible (such as machinery, factories, and offices) or intangible (such as technical expertise, trademarks, and patents)

Financial assets
Claims to the income generated by real assets. Also called securities.

Financial managers: stand between the firms real

assets and the financial markets in which the firm raises cash
CAPITAL BUDGETING DECISION: Decision as to which real assets the firm should acquire FINANCING DECISION Decision as to how to raise the money to pay for investments in real assets.
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Financial Managers (2)

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Financial decision
When a company needs financing, it can invite investors to put up cash in return for a share of profits or it can promise investors a series of fixed payments. In the first case, the investor receives newly issued shares of stock and becomes a shareholder, a part-owner of the firm. In the second, the investor becomes a lender who must one day be repaid. The choice of the longterm financing mix is often called the capital structure decision, since capital refers to the firms sources of long-term financing, and the markets for long-term financing are called capital markets. But the financial manager is also involved in some important short-term decisions.
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Financial institutions & market

Bank Insurance company Fund Financial

Why is a financial intermediary different from a manufacturing corporation?

First, it may raise money differently, for example, by taking deposits or selling insurance policies. Second, it invests that money in financial assets, for example, in stocks, bonds, or loans to businesses or individuals. The manufacturing companys main investments are in plant, equipment, and other real assets.
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Financial institutions & market (2)

When large firm could raise funds directly from investors, they sell financial assets to the public (if it's the first time: IPO). The sale is usually managed (guaranteed) by investment banks A new issue of securities is known as a primary issue and it is sold in the primary market. In addition to helping companies raise new cash, financial markets also allow investors to trade stocks or bonds between themselves. Such purchases and sales known as secondary transactions and they take place in the secondary market. Financial institutions and markets also have other function, such as The Payment Mechanism. Borrowing and Lending, Pooling Risk
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Reading
Chapter 2: Time value of Money

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Financial plan

(page 98)

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Planning model (1)

Example - Executive (or QCF) Cheese Company Past year

The firms financial planners forecast that total sales next year will increase by 10 % Then use the PERCENTAGE OF SALES MODELS: Planning model in which sales forecasts are the driving variables and most other variables are proportional to sales.
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Planning model (2)

New Income statement

How to finance?
Keep the same debt/equity level - borrow more $80

Equity: No need to issue new share - retaining $120 of income Planning dividend = $220 - $120 = $100
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Planning model (3)

Dividend payment depends on other decision (debt/equity ratio maintenance) - balancing item If dividend payment is determined independently (shareholders' interest) -> then debt/equity ratio becomes balancing item

How to finance: retain $40 and borrow $160

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Planning model (4)

Now put more stuff into

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Planning model (5)

Forecast

Balance sheet is no more balanced!

Somehow the firm will need to raise an extra $64,000? - External financing is the balancing item

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Planning model (6)

Raise by debt

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Planning model (7)

Exercise: build the QCF fruit spreadsheet

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External financing and growth

External financing

when the firm does not need external funding?

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External financing and growth

Internal growth rate

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External financing and growth

Sustainable growth rate
The firm issues only enough debt to keep its debt-equity ratio constant. The sustainable growth rate is the highest growth rate the firm can maintain without increasing its financial leverage.

Proof: exercise

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Financial statements
The Balance Sheet
already learned

The Income Statement

already learned

The Statement of Cash Flows

a little bit more tricky

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The Balance Sheet (1)

A snapshot of the firms assets and the source of the money that was used to buy those assets

The accountant puts the most liquid assets at the top of the list and works down to the least liquid. Asset that are likely to be used or turned into cash in the near future. They are therefore described as current assets.
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The Balance Sheet (2)

Depreciation: rule of thump: allocate the original cost of the asset over its life (may not reflect actual loss of market value) Current liability: liabilities that are likely to be paid off most rapidly Net current asset (net working capital) = current asset - current liability What is left over after the liabilities have been paid off belongs to the shareholders Book value (value appear in the BS) could be different from market value, especially for large fixed asset (same for long-term liability) The book value of equity measures the cash that shareholders have contributed in the past plus the cash that the company has retained and reinvested in the business on their behalf The market value balance sheet is forward-looking. It depends on the benefits that investors expect the assets to provide.
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The Income Statement

It shows how profitable the firm has been during the past period

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The Statement of Cash Flow

Difference between profit and Cash flow?

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The Statement of Cash Flow

Difference between profit and Cash flow?
Depreciation vs Capital expenditure:
To calculate the cash produced by the business it is necessary to add back the depreciation charge (which is not a cash payment) and to subtract the expenditure on new capital equipment (which is a cash payment).

Sale and receivable:

The cash that the company receives is equal to the sales shown in the income statement less the increase in unpaid bills:

Cost of production and inventories:

The cash outflow is equal to the cost of goods sold, which is shown in the income statement, plus the change in inventories:

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The Statement of Cash Flow

The statement of cash flows shows the firms cash inflows and outflows from operations as well as from its investments and financing It contains three sections:
The first shows the cash flow from operations. Next comes the cash that the firm has invested in plant and equipment or in the acquisition of new businesses. The final section reports cash flows from financing activities such as the sale of new debt or stocks.

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The Statement of Cash Flow

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Case study
Vinamilk 2009-2010

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