1. 1-1 Brokers Awareness program (4) Dr. Mounther Barakat Securities and Commodities Authority

2. 1-2 برنامج توعية الوسطاء اللقاء الرابع د. منذر بركات العمري هيئة الاوراق المالية والسلع

3. 1-3 The Annual Report التقرير السنوي Balance sheet – provides a snapshot of a firm’s financial position at one point in time. Income statement – summarizes a firm’s revenues and expenses over a given period of time. Statement of retained earnings – shows how much of the firm’s earnings were retained, rather than paid out as dividends. Statement of cash flows – reports the impact of a firm’s activities on cash flows over a given period of time.

4. 1-4 Balance Sheet: Assets قائمة المركز المالي - الاصول Cash A/R Inventories Total CA Gross FA Less: Dep. Net FA Total Assets 2006 7,282 632,160 1,287,360 1,926,802 1,202,950 263,160 939,790 2,866,592 2005 57,600 351,200 715,200 1,124,000 491,000 146,200 344,800 1,468,800

5. 1-5 Balance sheet: Liabilities and Equity قائمة المركز المالي – الخصوم وحقوق الملكية Accts payable Notes payable Accruals Total CL Long-term debt Common stock Retained earnings Total Equity Total L & E 2006 524,160 636,808 489,600 1,650,568 723,432 460,000 32,592 492,592 2,866,592 2005 145,600 200,000 136,000 481,600 323,432 460,000 203,768 663,768 1,468,800

6. 1-6 Income statement قائمة الدخل Sales COGS Other expenses EBITDA Depr. & Amort. EBIT Interest Exp. EBT Taxes Net income 2006 6,034,000 5,528,000 519,988 (13,988) 116,960 (130,948) 136,012 (266,960) (106,784) (160,176) 2005 3,432,000 2,864,000 358,672 209,328 18,900 190,428 43,828 146,600 58,640 87,960

7. 1-7 Other data معلومات أخرى No. of shares EPS DPS Stock price 2006 100,000 -$1.602 $0.11 $2.25 2005 100,000 $0.88 $0.22 $8.50

8. 1-8 Did the expansion create additional net operating after taxes (NOPAT)? حسابات الدخل التشغيلي بعد الضريبة NOPAT = EBIT (1 – Tax rate) NOPAT 06 = -$130,948(1 – 0.4) = -$130,948(0.6) = -$78,569 NOPAT 05 = $114,257

9. 1-9 What effect did the expansion have on net operating working capital? حسابات صافي رأس المال العمل NOWC = Current - Non-interest assets bearing CL NOWC 06 = ($7,282 + $632,160 + $1,287,360) – ( $524,160 + $489,600) = $913,042 NOWC 05 = $842,400

10. 1-10 What effect did the expansion have on operating capital? حسابات رأس المال التشغيلي Operating capital = NOWC + Net Fixed Assets Operating Capital 06 = $913,042 + $939,790 = $1,852,832 Operating Capital 05 = $1,187,200

11. 1-11 What is your assessment of the expansion’s effect on operations? ملاحظات من حسابات التشغيل Sales NOPAT NOWC Operating capital Net Income 2006 $6,034,000 -$78,569 $913,042 $1,852,832 -$160,176 2005 $3,432,000 $114,257 $842,400 $1,187,200 $87,960

12. 1-12 What was the free cash flow (FCF) for 2002? حساب التدفق النقدي الحر FCF 06 = NOPAT – Net capital investment = -$78,569 – ($1,852,832 - $1,187,200) = -$744,201 Is negative free cash flow always a bad sign?

13. 1-13 Economic Value Added (EVA) حساب القيمة المضافة EVA = After-tax __ After-tax Operating Income Capital costs = Funds Available __Cost of to Investors Capital Used = NOPAT – After-tax Cost of Capital

14. 1-14 EVA Concepts مفهوم القيمة الاقتصادية المضافة In order to generate positive EVA, a firm has to more than just cover operating costs. It must also provide a return to those who have provided the firm with capital. EVA takes into account the total cost of capital, which includes the cost of equity.

15. 1-15 What is the firm’s EVA? Assume the firm’s after-tax percentage cost of capital was 10% in 2000 and 13% in 2001. حساب القيمة الاقتصادية المضافة EVA 06 = NOPAT – (A-T cost of capital) (Capital) = -$78,569 – (0.13)($1,852,832) = -$78,569 - $240,868 = -$319,437 EVA 05 = $114,257 – (0.10)($1,187,200) = $114,257 - $118,720 = -$4,463

16. 1-16 Did the expansion increase or decrease MVA? حساب القيمة السوقية المضافة MVA = Market value __Equity capital of equity supplied It measures the value added to the company from its activities since its inception. Can not tell who did what.

17. 1-17 Calculating Key Multipliers حساب المضاعفات - مثال P/E= Price / Earnings per share = $12.17 / $1.014 = 12.0x P/CF= Price / Cash flow per share = $12.17 / [($253.6 + $117.0) ÷ 250] = 8.21x

18. 1-18 Calculating Key Multipliers حساب المضاعفات - مثال M/B= Mkt price per share / Book value per share = $12.17 / ($1,952 / 250) = 1.56x 2007*20062005Ind. P/E12.0x-1.4x9.7x14.2x P/CF8.21x-5.2x8.0x11.0x M/B1.56x0.5x1.3x2.4x

19. 1-19 Analyzing the multipliers تحليل المضاعفات P/E: How much investors are willing to pay for $1 of earnings. P/CF: How much investors are willing to pay for $1 of cash flow. M/B: How much investors are willing to pay for $1 of book value equity. For each ratio, the higher the number, the better. P/E and M/B are high if ROE is high and risk is low.

20. 1-20 Trend analysis تحليل النمطية Analyzes a firm’s financial ratios over time Can be used to estimate the likelihood of improvement or deterioration in financial condition.

21. 1-21 Potential uses of freed up cash استخدامات التدفق النقدي الحر Repurchase stock Expand business Reduce debt All these actions would likely improve the stock price.

22. 1-22 Margin is the amount you put up to trade without paying the full balance. Initial margin (IM) is the value of your equity in the margin trade. Maintenance margin (MM) is the minimum equity you need to maintain at all time. Margin call (MC) is the amount that you need to put up to bring your equity back to the initial margin. Margin Trading الاتجار بالهامش

23. 1-23 Margin Trading الاتجار بالهامش XYZ is now selling at DHS 10. You have DHS 5000 and would like to purchase 1000 shares. Your broker is willing to extend you a loan at the call money rate+2% for processing and other costs. Maintenance margin is 37.5%. Calculate your profits and losses in the case of 10% price move in both directions. Calculate the minimum price before getting a margin call.

24. 1-24 Margin Trading الاتجار بالهامش AssetsDHSLiabilities & Equity DHS 1000 shares @ 10 10000Loan5000 Equity5000 TA10000TC1000 0 Price @ DHS 10

25. 1-25 Margin Trading الاتجار بالهامش AssetsDHSLiabilities & EquityDHS 1000 shares @ 11 11000Loan5000 Equity6000 TA11000TC11000 Price up by 10% @ DHS 11

26. 1-26 Return with and without use of margins. Without margin: R=(11000-10000)/10000=10%. With margin: R=(6000-5000)/5000=20%. Your margin is 6000/11000=54.54% Margin Trading الاتجار بالهامش

27. 1-27 Margin Trading الاتجار بالهامش AssetsDHSLiabilities & EquityDHS 1000 shares @ 99000Loan5000 Equity4000 TA9000TC9000 Price down by 10% @ DHS 9

28. 1-28 Return with and without use of margins. Without margin: R= (9000-10000)/10000= -10%. With margin: R= (4000- 5000)/ 5000= -20%. Your margin is 4000/9000=44.44% Margin Trading الاتجار بالهامش

29. 1-29 Margin Trading الاتجار بالهامش The minimum price before hitting the first margin call is: P=(IM*P 0 )/(1-MM) In our example: P=(.5*10)/(1-.375)=8

30. 1-30 Margin Trading الاتجار بالهامش AssetsDHSLiabilities & Equity DHS 1000 shares @ 8 8000Loan5000 Equity3000 TA8000TC8000 Price @ DHS 11 which the margin call price.

31. 1-31 Margin Trading الاتجار بالهامش Return with and without use of margins. Without margin: R= (8000-10000)/10000= -20%. With margin: R= (3000- 5000)/ 5000= -40%. Your margin is 3000/8000=37.5%

32. 1-32 Margin Trading الاتجار بالهامش Need to add cash to the account to go back to 50% or as agreed with the broker. Margin call calculations: cash = P*N*IM-Eq Cash= 8*1000*0.5-3000 = 1000

33. 1-33 Margin Trading الاتجار بالهامش AssetsDHSLiabilities & Equity DHS 1000 shares @ 8 8000Loan5000 Cash1000Equity4000 TA9000TC9000 Your margin now is: M=Eq/Inv. = 4000/8000= 50% back to IM.

34. 1-34 Margin Trading الاتجار بالهامش See XLS file for further training

35. 1-35 Short Selling and Margins الهامش والبيع على المكشوف Margin is the amount of cash you put up as a security against the increase in your liability due to short selling. Initial margin (IM) is the value of your cash balance against the short sold position (liability). Maintenance margin (MM) is the minimum equity you need to maintain at all time. Margin call (MC) is the amount that you need to put up to bring your equity back to the initial margin.

36. 1-36 Short Selling and Margins الهامش والبيع على المكشوف XYZ is now selling at DHS 10. You would like to short 1000 shares. Your broker requires a 50% cash margin paid up front. Maintenance margin is 37.5%. Calculate your profits and losses in the case of 5% price move in both directions. Calculate the minimum price before getting a margin call.

37. 1-37 Short Selling and Margins الهامش والبيع على المكشوف AssetsDHSLiabilities & EquityDHS Cash from selling 1000 shares @ 10 10000Liability (short position) 10000 Cash required as a margin 5000Equity5000 TA15000TC15000 Price @ DHS 10

38. 1-38 Short Selling and Margins الهامش والبيع على المكشوف AssetsDHSLiabilities & EquityDHS Cash from selling 1000 shares @ 10 10000Liability (short position) 10500 Cash required as a margin 5000Equity4500 TA15000TC15000 Price up by 5% @ DHS 10.50

39. 1-39 Return with and without use of short selling. Without short selling: R=(10500-10000)/10000=5%. With short selling: R=(4500-5000)/5000=-10%. Your margin is: 4500/10500=42.86% Short Selling and Margins الهامش والبيع على المكشوف

40. 1-40 Short Selling and Margins الهامش والبيع على المكشوف Price down by 5% @ DHS 9.5 AssetsDHSLiabilities & EquityDHS Cash from selling 1000 shares @ 10 10000Liability (short position) 9500 Cash required as a margin 5000Equity5500 TA15000TC15000

41. 1-41 Return with and without use of short selling. Without short selling: R=(9500-10000)/10000=-5%. With short selling: R=(5500-5000)/5000=10%. Your margin is 5500/9500=57.89% Short Selling and Margins الهامش والبيع على المكشوف

42. 1-42 Short Selling and Margins الهامش والبيع على المكشوف The minimum price before hitting the first margin call is: P=P0*(1+IM)/(1+MM) In our example: P=10*(1+.5)/(1+.375)=10.909

43. 1-43 Short Selling and Margins الهامش والبيع على المكشوف Price @ DHS 10.909 AssetsDHSLiabilities & EquityDHS Cash from selling 1000 shares @ 10 10000Liability (short position) 10909 Cash required as a margin 5000Equity4091 TA15000TC15000

44. 1-44 Short Selling and Margins الهامش والبيع على المكشوف Return with and without use of short selling. Without short selling: R=(10909-10000)/10000=9.09%. With short selling: R=(4091-5000)/5000=-18.18%. Your margin is 5500/9500=37.5%

45. 1-45 Short Selling and Margins الهامش والبيع على المكشوف Price @ DHS 12 AssetsDHSLiabilities & EquityDHS Cash from selling 1000 shares @ 10 10000Liability (short position) 12000 Cash required as a margin 5000Equity3000 TA15000TC15000

46. 1-46 Short Selling and Margins الهامش والبيع على المكشوف The position now is 12000 and the equity is 3000. The drop in equity is equal to the difference between the initial position and the current position value. That makes our margin below the 37.5% maintenance margin. Cash is needed to go back to the initial margin.

47. 1-47 Short Selling and Margins الهامش والبيع على المكشوف Need to add cash to the account to go back to 50% or as agreed with the broker. The drop in equity is equal to: Current position – initial position 12000-10000 = 2000 The value of current equity is equal to the initial equity – the drop 5000-2000 = 3000 The margin now is equal to Current equity/current position 3000/12000= 25% This less than the 37.5% maintenance margin. To go back to the initial margin, we need to add cash to answer the margin call.

48. 1-48 Short Selling and Margins الهامش والبيع على المكشوف To go back to the initial margin of 50% we need to make equity equal to half the current liability position: IM*P1*N= 0.5*12*1000 = 6000 Margin call calculations: Margin call amount = Current Equity requirement-Current equity 6000-3000 = 3000

49. 1-49 Short Selling and Margins الهامش والبيع على المكشوف See XLS file for further training

50. 1-50 Advanced Margin Calculations حسابات هامش اكثر تعقيدا Margin Accounts can become very complex especially if there are multiple diverse transactions. An example would be to calculate the margin requirements for buying a stock on margin and short selling another. Or, you may want to add to that some other securities purchased without the use of margin. Or, add to all of the above margin calculations for futures contracts and options premiums. Will revisit later on.

51. 1-51 Segregation of Clients Accounts فصل الحسابات Client Money is separated from brokers money. Brokers can no longer use one client money (free of charge) to lend to other clients for stock purchases. Benefits: Lower risk. Enhance the availability of cash for clients withdrawals.

52. 1-52 Segregation of Clients Accounts فصل الحسابات Where does the cash go? To banks. Why then move the cash from brokers to banks? Two reasons: Banks enjoy higher liquidity and greater readiness to answer cash demand. Bank capital is structured to have a component that accounts for these deposits, brokers do not.

53. 1-53 Segregation of Clients Accounts فصل الحسابات What are the problems with brokers practice of using clients cash to finance other clients stock purchases? Risk of illiquidity Strains on leveraged brokers accounts No brokers capital rules to protect loans made to clients using other clients money Brokers are not allowed to make such loans by legal definition of brokering There are no regulations for margin trading in place.

54. 1-54 Segregation of Clients Accounts فصل الحسابات What are the problems of account segregation? - Lower liquidity for trading. Well this liquidity is not allowed in the first place and markets should have never used this extra liquidity.

55. 1-55 Segregation of Clients Accounts فصل الحسابات If brokers are so concerned about this lack of liquidity and they think it is not healthy to stay without it – then why not bear the cost of borrowing from banks to create this claimed extra liquidity? In no way does the SCA condone or encourage brokers to do so, not until the regulations that deal with that are ready. These regulations are being worked on and will be ready very soon.

56. 1-56 Segregation of Clients Accounts فصل الحسابات So, to avoid this lack of liquidity, why didn’t SCA delay account segregation until after it had such regulations in place? Well, SCA never allowed lending by brokers and such lending should not be happening.

57. 1-57 Segregation of Clients Accounts فصل الحسابات What is the difference between the current informal lending and the lending under SCA regulations?

58. 1-58 Segregation of Clients Accounts فصل الحسابات Under the regulations things will be: Organized Safe Fair And controllable

59. 1-59 Market Making صناع السوق Evidence shows that two of the main problems that emerging markets face are: Capital supply shortage and low liquidity

60. 1-60 Market Making صانع السوق

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