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Analysis of financial stmt

 Balance sheet(Snap shot of assets and liabilities of a company)

 Income stmt(profit and loss)
 Cashflow stmt
 Shareholders equiry statement

Invest ment decisions and capital budgeting(refers to ASSETS in balance sheet)

 Intrest
 Time value
 Cash flow(discounted cash fow)
 Working capital or cash management

Risk and return

 Port folio theroy

 Capital asset pricing model(bill sharp won noble price)

Crporate financing and capital structure

 Source of finance
 Cost of capitals
 Dividend policy
 Liverage policy

Valuation

 Share
 Bond
 Option
 Corporate

Org Structure
PROPRATOR:

advantage

 Easy to setup
 Single taxation

Disadvantage

Unlimited liability, owner can lose his personal belongings in case of bankruptcy along with ceasing
asset

PARTNEER SHIP : same as properator ship but the partner ship ends with the death of partners.

CORPORATION(LTD) ::does not ends until the owners ends it

 Limited(liability of shareholders is limted) company registered by state

 DISADVANTAGE , double tax(Corporate tax and dividend tax)

HYBRID

 S TYPE: limited company with out double taxation.

 LLP(limited liability partnership):
 PC: Professional corporation ie., Doctors(limiteed liability on doctors on mal-praactise,
introduced recently in USA)

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BALANCE SHEET(Snap shot of assets and liabilities of a company)

 NET-WORKING CAPITAL is the diffrence between the asset and liability

  MARKETABLE SECURITIES(asset) is the process of a company purchasing shares of other
company for increacing the profit.
 EQUITY(lianiity) : Is the process of selling shares for financial needs.

Business env.

TURE

ASSETS

 TANGIBLE :touchable , feelable, or measurable

 INTANGIBLE: non measurable
 REAL ASSEST appear in the balance sheet and they appear as fixed assets, inventry or stock.
 SECURITY is a paper that represents the clams on the assets.(direct and indirect securities)
 DIRECT SECURTY:Stock or Bonds , Value depends on the cash flows generated by the assets,
use DCF(discount cash flow tecqunic)
BONDS: Is a long-term debt contract issues by a borrowing company(Bank or personal)

 A bond is a long term liability represented in a balance sheet

 Bond holder gets a floting or fixed predetermined intrest

Types of bonds:

 DEBENTURE: Unsecured, since no need to show the property proof, but high ROI
 MORTGAGE : Secured , by real time property, ie land or house
 OTHER: euro, zero and junk bonds.

SHARES: Stock is a paper represents owner ship in a company

 Share represets owner ship , but bonds does not represent ownership
 Shares represents equity in balance sheet.

VALUE:

 Financial accounting takes the historcal cost into account(purchaprse price)

 Fincancial management takes market cost into account.(present price)
 LIQUIDATION VALUE : Value if a company is closed down and its assets were sold.
 FAIR VALUE OR INSTRINSIC VALUE: Present value of working assets, calculated using DCF.

Analysis of financial stmt

 Balance sheet(Snap shot of assets and liabilities of a company)

 Income stmt(profit and loss)
 Cashflow stmt
 Shareholders equiry statement

FUNDAMEVTAL ACCOUNTING STMT(FAS):

 Assets-Expenses = Liabilities+ Shareholders Equity + Revenue

 Assets and Expenses increases when debited
 Liabilities, Shareholders Equity and Revenue increaes when credited
BALANCE SHEET(Ststic snap shot of assets and liability)

 Net worth(working capital) = Current asset=Current liability

 Working capital represents liquidity(Easy of encashing)
 Equity is the shares soled by a company
 Retained earning is the process of holding shares for companies benefit.

PROFIT / LOSS STATEMENT: income stmt

 FLOW statement since they dont rep historic values

 Temporary statement because it is set to zero after a particular accounting cycle
 INCOME = REVENUE – EXPENSE
 GROSS REVEUE = OPERATIONAL REVENUE - COST OF GOODS SOLD
 OPERATING REVENUE = GROSS REVENUE – ADMIN AND OPERATING EXP
 EBT(earning before taxation)=operating revenue- other expenses+ other revenue
 Net income = EBT - ttax
 Retained earnings = net income – dividends.
 Income is based on accrual principle( acrual states that “ record the value of a goods or a
service when you deliver or avail it”.

CASHFLOW:

1) OPERATIONS
 DIRECT
 INDIRECT
2) INVESTMENT
3) FINANCING
 CASH FLOW is calculated from 2 consicutive year balance sheets.

Depriciation

 a vehicle that depreciates over 5 years, is purchased at a cost ofUS$17,000, and will have a salvage
value of US$2000, will depreciate atUS$3,000 per year: ($17,000 − $2,000)/ 5 years = $3,000 annual
straight-linedepreciation expense.

RATIO ANALYSIS

LIQUIDITY RATIO

 CURRET RATIO: current asset/current liabilities

 QUICK/ACID TEST: (Current assets- Inentory)/ curre t liability
 AVG COLLECTION PERIOD : net sales / avg accounts receivable

PEOFITABILITY RATIO

 Profit margin= net income/sale

 ROA(asset)=net income/total asset
 ROE(equity)=Net income/comon equity

ASSET RATIO:
Important concepts:

1. TIME VALUE OF MONEY: TODAYS 1 RS IS MORE VALUABLE THAN TOMORROW’S 1 RS

2. RISK AND RETURN : safe 1 rs is more valuable than risky 2 rs
3. Discounting and netpresetn value: Compare diff. Investment at same point of time
4. Portfolio diversification principle on risk : dont invest all money in one share(dont put all the
eggs in a single basket)
5. Heging and insurance: Get eggs insured before it breaks to avoid big loss.

INTREST based on economic theory: Is a equlibirium price where demand and supply of funds meet

FACTORS THAT DETERMMINE NOMINAL INTREST RATE

 Risk free rate of RETURN: T-bills of USA

 Rate of inflation: Expected inflation over life
 Default risk premium: Risk of a company to go bankrupt
 Maturity risk premium: Risk involved in share value to go down in a period of time
 Soverent risk premium: Political risk involved in investing in a contry
 Liquidity preference: How fast the share can be converted into money(Easy to encash)

Intrest = Risk free rate of RETURN+ Rate of inflation+ Default risk premium+ Maturity risk premium+
Soverent risk premium+ Liquidity preference

YIELD CURVE: intrest rate variation(short term rate, or long term rate)

 Normally short term intrest rate is less than Long term, and its called Normal Yield curve. It
is based on the expectation theory of investers that intrest increases on a period of time.
 Abnormal Yield curve: Short term intrest rates are higher than the long term, due to market
segmentation(demand in supply).

Simple intrest:

 Future Value= Present Value+(Present value * intrest rate*time period)

Discrete Compound intrest:

 Future Value(Yearly) = Presesent Value*(1+intrest rate)^time period

 Future Value(Quarterly) = Presesent Value*(1+[intrest rate/3])^time period*3

Continous or exponential compont intrest:

 Future Value= Present Value *e^(i*n) [Value of e is 2.7]

 Banks are not offering this method in pakistan because of high rate of intrest

FINANCIAL PLANNING AND FINANCIAL FORCASTINGNEED

 To reduce the cost of emergency plannimg

 To be prepared for the future opportunities

PLANNING DOCUMENT(pro forma - forcasted)

1) Cash budget
2) Pro forma balance sheet
3) Pro forma income statement

Fixed Assets: Assets does not changes, when the revenue increases, ie., office, machinary
Revenue forcast Problem stmt:

Expected revene: 200000 to 300000, Expected expenses: 50000 to 70000

Revenue= (300000-200000)/200000= 50%

Expenses=70000-50000/50000=40%

DISCOUNTIN AND NET PRESENT VALUE:

3 TYPES OF INTREST

1) Nominal Intrest = Risk free rate of RETURN+ Rate of inflation+ Default risk premium+
Maturity risk premium+ Soverent risk premium+ Liquidity preference
2) Periodic intrest = nominal intrest/ no. Of times componding takes place in a yr.
3) Effective intrest rate(for comparing rates of 2 diffrent product with diffrent compounding
cycles), = [1+(nominal intrest/coumpound cycle)]^coumpound cycle-1

Discounting formula: Present value=Future Value/(1+i)^n

I have 105rs in bank for 1yr with 10% intrest, calculate the money before 1 yr

105/(1+.5)^1=95.45rs

Annuity & Prepetuity

Annuity: Constant cash flow at the end of every year, throughout a limited period of time

FV=CCF[((1+i)^n -1 )/i]

In case of multiple conpounding in a year,

FV=CCF[((1+[i/m])^[n*m] -1 )/[i/m]]

Example:

Original cost of the car: 150,000

On leasing the car, r.o.i= 20%, Constant cash flow(yearly payment)= 120,000

FV=120,000[((1+0.2)^2 -1)/0.2] = 264,000

PV=264,000/(1+0.2)^2= 183,333.

Prepetuity: Constant cash flow at the end of every year, does not has any time frame(endless), eg:
retairment plans.

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Common stock

 Holder is a owner of busniness

 Has rights to vote
 Gets ROI and sometimes divident

P = D1/(k-g)

P= preset value, D1= year 1 divident, k= required return, g= growth rate

You are considering the purchase of a stock tha just paid a dividend (d0) 3$, dividends are forcasted
to grow 5%, u feel 11.5% required return is appropriate. Fine the Present value

D1= 3(1+.05)=3.05

P=3.05/115-.05 =48$

Prefered stock

P=D/k

Calculate value of 5.5% preferred stock with 100$ par value and 8.2% required return

D=.55*100=5.5$ /year

P=D/k = 5.5/.082=67$