Finance Management

Index

Introduction & Firm Obj...................................................................................... 2

Weird business ............................................................................................................. 2
What is Managerial Finance? ....................................................................................... 2
Investment ................................................................................................................... 3
Finance ....................................................................................................................... 3
Dividends .................................................................................................................... 4
Corporate Finance Big Picture ............................................................................................ 4
Why Finance is of a major importance ......................................................................... 5
Corporate Governance and the Firm Objective ............................................................ 5
The Agency Problem (Sarbans-Oxley Act 2001)....................................................................... 6
Forms of Business Organization ................................................................................... 7
Corporate governance .................................................................................................. 7
Shareholder structure ....................................................................................................... 7
Analysis of Board .......................................................................................................... 7
Society ....................................................................................................................... 8
Financial analysis ................................................................................................. 9
Fundamental Analysis - Top Down Approach ............................................................... 9
Country Level ............................................................................................................... 9
Sector Level ................................................................................................................. 9
Industry Level ............................................................................................................... 9
Firm Level ................................................................................................................... 9
Ratio Analysis ............................................................................................................ 10
Accounting review ........................................................................................................ 10
Liquidity ratios ............................................................................................................. 11
Financial leverage (Capital structure ratios) ........................................................................... 12
Assets Management Efficiency Ratios .................................................................................. 13
Profitability Ratios ........................................................................................................ 15
Time Value of Money .......................................................................................... 18
Future value............................................................................................................... 18
Single cash ................................................................................................................. 19
Multiple cash ............................................................................................................... 19
Ordinary Annuities cash .................................................................................................. 20
Constant Perpetuities Annuities cash ................................................................................... 20
Growing Perpetuities Annuities cash ................................................................................... 20

1
facebook.com/TamerShawerPage
 Introduction & Firm Obj

Weird business
The Business World is very weird not to mention financial world!!

 Lehman Brothers assets was $639 bn vs Egypt GDP $452 bn, and at the end LB was down

 While a person like Warren Edward Buffett is the most successful investor in the world, and
is consistently ranked among the world's wealthiest people and his investing could bit the
market

 What is Bit the Market

Bit the market mean that investing with this corporate is better than the market return, while
market return mean the average profit gain when you invest in different countries (somehow
guarantee)

What is Managerial Finance?

Three main decisions that should be taken

Investment Financing Dividends

 The main aim of this decisions is to Maximize the Value of the firm (OR maximize the stock
price)

2
facebook.com/TamerShawerPage
 Investment
What long-term investments should you take on?

Investment If you don’t grow you will go

back, so we need to invest

Opportunity NO

Cost ? Yes

Can’t guarantee because Expected

it’s in future (uncertainty) return

Our aim is
to reduce
uncertainty

Finance
Where will you get the long-term financing to pay for your investment? Will you bring in other
owners or will you borrow the money?

Finance

You have money Don’t have money

Own or partners Others

Equity Debit

3
facebook.com/TamerShawerPage
  Theory of Debt
More is better than less, unless the more will make you less in your position.

Some other refuse it for other religious reasons

Dividends
The dividends is the part of profit that given to the owners

Profit

Reinvest (Returned
Dividends
earning)

The decision is how much to keep

Corporate Finance Big Picture

4
facebook.com/TamerShawerPage
 Why Finance is of a major importance
Every decision that a business makes has financial implications.

Corporate
Finance

Assessing the Analyze the

The financial Assessing the financial
Information for financial payoff to
analysis of pricing financial value of consequences of
making better overcome
and product human capital: production and
financial decision: barriers to entry:
strategies: HUMAN operation:
ACCOUNTING CORPORATE
MARKETING RESOURCE OPERATION
STRATEGY

Conclusion: everything that a business does fits under the rubric of corporate finance

Corporate Governance and the Firm Objective

As we Agreed the firm objective is maximize the stock price, however maximizing the stock
price doesn’t mean that we neglect the other objectives of employee, customers and society, as:
 Firms that maximize stock price generally are firms that have treated employees well.
 Maximizing stock price does not mean that customers are not critical to success. In most
businesses, keeping customers happy is the route to stock price maximization.
 Maximizing stock price does not imply that a company has to be a social outlaw, and having
money will help them to pay back to society (CSR)

5
facebook.com/TamerShawerPage
 The Agency Problem (Sarbans-Oxley Act 2001)
The relationship between stockholders and management is called an agency relationship. Such a
relationship exists whenever someone (the principal) hires another (the agent) to represent his
or her interests. For example, you might hire someone (an agent) to sell a car you own while
you are away at school. In all such relationships, there is a possibility of conflict of interest
between the principal and the agent. Such a conflict is called an agency problem.

In response to corporate scandals at companies such as Enron, WorldCom, Tyco, and Adelphia,
Congress enacted the Sarbanes–Oxley Act in 2002. The act, better known as “Sarbox,” is
intended to protect investors from corporate abuses

 Managers (Agencies) role toward others:

 What Managers (Agencies) get in return

6
facebook.com/TamerShawerPage
  How managers (Agencies) could abuse others

Forms of Business Organization

Three major forms
1) Sole proprietorship
2) Partnership
3) Corporation

In this course we are dealing with CORPORATION which represent 20% but responsible for
80% of the international production

Corporate governance
Shareholder structure
Institutional vs free float
More institutional is much better because they have more knowledge and specialist who work
with to determine which to invest in, but the problem lay if their benefits counteract the
individuals’ benefits (could hurt individuals by manipulating)

The question we try to answer here, who control this firm? For this point and the coming point,
analysis of board

Analysis of Board
 It’s better that most of the board member from the share holder
 The better that the board member majority to be from outsider
 The count of member preferred to be odd number

7
facebook.com/TamerShawerPage
  We should now from the board guidelines how is the chairman is nominated
 Its better that the chairman is not the same person as the CEO (accept if he had a perfect
vision for the industry like Apple)

Society
 The shareholders want the value of corporate donation for community (CSR) to be zero
while the community want it to be 100%
 We could use marketing campaign to overcome this constrain, by market to the company
and at the same time donate to the community

8
facebook.com/TamerShawerPage
 Financial analysis
Efficient Market hypothesis “EMH”

Financial analysis

Technical
Fundemental
(Price bhaviour - Chart
(Top down analysis)
analyisi)

Because we are academic course we will study the fundamental financial analysis

Fundamental Analysis - Top Down Approach

Using a "Top Down" approach for fundamental analysis means beginning your analysis on a Global
Macroeconomic level right from the start, moving to consecutive narrower economic levels until you reach the
individual business itself.

Country Level
Sector Level
Industry Level
Firm Level
Country Level
Due to fluctuations in currencies, employment, government stimulus and taxation issues among other things,
specific countries may be doing better economically than others. Particularly when considering whether to
invest in or not (eg: Inflation, GDP, culture, level of education, ..)

Sector Level
After taking at look and narrowing down to a country economy that is doing well, take a look at how specific
sectors may be doing, and their outlook. An example of a sector would be the "Technology Sector".

Industry Level
Taking one step further, once a sector is targeted, take a look within that sector to see which industry may
be doing better than others, and their outlook. An example of an industry within the "Technology Sector"
would be "Application Software". (eg: potential growth, life cycle, …)

Firm Level
Once you have narrowed down a possible Industry, take a look at potential individual businesses within that
industry. An example of an individual business with the "Application Software" industry would be "Microsoft".
(eg: Ratio Analysis, ..)

9
facebook.com/TamerShawerPage
 Ratio Analysis
Accounting review

Basic Equation

= +
Assets Liabilities Equity

Intangeble Current
Current Assets Fixed Assets Long term Liabilities Capital
Assets Liabilities

Short term Retaind

Cash equipment brand long term loan
loan earning

Accounting
Inventory real estate franchise Bond
payable

Unearned
Supplies furniture trademark
revenue

Account
Know how
recivables

Prepaid
Expences

Three steps of financial analysis

 Convert numbers to ratio (to standardize evaluation)
 Know the meaning of this ratio (what the ratio tell you) Interpret
 Benchmark this ratio to one of the following
o Trend Analysis (the corporate historical data) – better if you don’t have competitor in
the market (Ezz Steel) with your previous financial statements.
o Industry average (the average of you industry information) – (Alsham3edan)
o Compare to competitors (per group analysis) – for big players (Vodafone \ Coca cola)

10
facebook.com/TamerShawerPage
 Liquidity ratios
Do the firm have enough money to pay its duties?
We measure the firm ability to meet its short term obligation

Current ratio

 From the balance sheet

 If the current ratio is too big then the benchmark value, it is not good also, we name the
company conservative corporate, they should invest more than keeping the cash.
 Mobinil Example
 Current Ratio = CA / CL
 3,010 / 5,243= 0.57 times
 The firm had 0.57 LE in current assets for every 1 LE it owed in current liability
 (2010 – 0.4) (2009-0.3) (2008- 0.29)
 Industry 1 (1 for other industries consider little ratio, but for this fast collection industry
(Almost all transactions are cash) it is OK)

Quick ratio

 From the balance sheet

 This ratio excludes the inventory from current assets as inventory may not always be very
liquid (couldn’t be liquefied easily)
 This is useful when you want to make sure that your current assets could cover any short
term current liabilities with a margin save of not adding the Inventory.
 Mobinil Example
 Quick Ratio = (CA – Inventory) / CL
 (3,010 – 133) / 5243 =0.54 times
 the firm has 0.54 LE in current assets (less inventory) to cover 1 LE in current liabilities
 (2010- 0.38)(2009- 0.29) (2008 – 0.26) industry 0.8

NB: in some corporates the profit could be misleading, because the management are selling the
corporate assets, and in the other hand, lose could be acceptable if there are big investment
paid

11
facebook.com/TamerShawerPage
 Financial leverage (Capital structure ratios)
Refers to the way a firm finances its assets (The firm ability to manage its liabilities)

Total Debt ratio

 From the balance sheet

 How many of the firm assets financed by loans, the lower is better
 The lower mean that your frim had low burdens from investment and increase your
opportunity to take loans, and reflect your general financial status.
 Mobinil Example
 Total Debt Ratio = (TA – TE) / TA or TL / TA
 (16,776 – 3,587) / 16,776 = 0.78 times or 78%
 This mean that the firm financed 78 % of its assets with debt & 22 % is financed by equity
 (2010- 68%) (2009- 74%) (2008 – 84%)
 Industry 70% (For this industry, which considered as a cash cow, this percentage is
reasonable, because banks could guarantee money return)

Times interest earned ratio

 From the income statement

 What is the firm ability to pay its interest?
 There is no limit for increasing the time interest ratio, the higher the better
 Mobinil Example
 EBIT / Interest
 939/ 838 = 1.12
 The firm profit cover 1.12 times its interest.
 (2010 – 3.8)(2009 - 4.5) (2008 – 5.2)
 Industry 4

2 More leverage ratios

 Debt/Equity = TD / TE
 Mobinil Example
o 13200) / 3587= 3.68 times
o (2010- 3.67) (2009 -2.9) (2008- 5.2 times)
o Industry 1.9
 Equity Multiplier = TA / TE = 1 + TD/TE
 Mobinil Example
o 1 + 3.68= 4.68 industry 2.29

12
facebook.com/TamerShawerPage
 Assets Management Efficiency Ratios
Asset management efficiency ratios measure
a firm’s effectiveness in utilizing its assets to Assets Sales
generate sales.

They are commonly referred to as turnover

ratios as they reflect the number of times a
particular asset account balance turns over Assets Management
during a year.

Fixed Current
Total Assets ratio Assets Assets
Sales
Total Assets =
Assets

 Represents the amount of sales A/R Inventory Cash

generated per dollar invested in firm’s
assets.
 How many times the assets can Cash
generate sales through the year (Turn
over)
 Mobinil Example
 Total Asset Turnover = Sales / Total A/R Inventory
Assets
 9767 /16776 = 0.58 times
 The firm generated 0.58 LE in sales per 1 LE of assets
 (2010 – 0.36) (2009- 0.74) (2008 – 0.74)
 Industry 0.75
 In this ratio there is something wrong in its calculation, because we get the Assets from the
balance sheet which is a snap shot for the current situation, and the sales from the income
statement, which is the total of the whole year, to calculate it right we should get the
average of both, but because we will keep measuring and comparing by this mistake so
there is no problem

13
facebook.com/TamerShawerPage
 Inventory ratio

Cost of Goods
Inventory ratio =
Inventory

 measures how many times the company turns over its inventory during the year
 Shorter inventory cycles lead to greater liquidity since the items in inventory are converted
to cash more quickly.
 We compare the Inventory to the Cost of goods not the whole sales, because inventory is
recorded with the cost value so it should be compared with the cost value of the quantity
sold, which is Cost of goods
 Mobinil Example
 Inventory Turnover = Cost of Goods Sold / Inventory
 2,339 / 177 = 13.2 times
 The firm turned over its inventory 13.2 times per year.
 (2010- 17.6) (2009 -16.81) (2008 – 18)
 Industry – 17
 In this ratio there are the same above mistake in the total assets ratio

Days’ Sales in Inventory

365
Days’ Sales in Inventory =
Inventory ratio
 The number of days the inventory sits unsold on the firm’s shelves
 Mobinil Example
 Days’ Sales in Inventory = 365 / Inventory Turnover
 365 / 13.2 = 27.65 days
 The firm, on average, holds it inventory for about 27.65 days
 Industry 20

Account receivable ratio

Sales
 A/R ratio = A/R
 Measures how many times accounts receivable are “rolled over” during a year
 It is compared to Credit sales not all the sales, because account receivable arise from
credit sales only not from the cash sales.
 Gives us an indicator to evaluate collection management in the firm.
 Mobinil Example
 Receivables Turnover = Sales / Accounts Receivable
 9676 / 524 = 18.4
 The firm’s accounts receivable were turning over at 18.4 times per year
 (2010- 26.2) (2009 – 35.96) (2008 – 40)
 Industry 35

14
facebook.com/TamerShawerPage
  In this ratio there are the same above mistake in the total assets ratio in addition that we
should subtract the cash sales from it, but we will keep also both mistakes

Average Collection Period

365
 Average Collection Period = A/R ratio
 Measures the average number of days it takes the firm to collects its receivables.
 Mobinil Example
 Days’ Sales in Receivables = 365 / Receivables Turnover
 365 / 18.4 = 19.8 days
 The firm collects its accounts receivable in average 19.8 days.

1 More Asset ratio

 Cash Cycle = DSI + DSR – DSP (Days of Sales Inventory\Receivables\Payable)
 DSP =365 / (Supplies / Acc Payable)
 expresses the length of time, in days, that it takes for a company to convert resource inputs
into cash flows., the lower this number is, the better for the company

Profitability Ratios
The profitability ratio measures a company’s profit in relation to its sales, assets, and equity.

ROE

Equity
Sales Profit
Assets

Profit Margin

ROI

Profit Margin: Net Income

 Profit Margin = Sales
 How many profit out of the sales
 Is how the firm controlling costs and earning reasonable profit margin?
 Mobinil Example
 Profit Margin = Net Income / Sales

15
facebook.com/TamerShawerPage
  170/ 9767 = 0.01 or - 1%
 99% of my sales are cost and 1% only profit
 (2010- 13%) (2009- 18.71%) (2008 – 19.9)
 Industry 14%

ROI (Return On Investment)

Net Income
 ROI =
Assets

 Is the firm efficiently utilizing the assets to generate sales

 Could be referred as ROA (Return On Assets) OR ROC (Return on Capital) OR AAR
Average Accounting Return)
 Mobinil Example
 Return on Assets (ROA) = Net Income / Total Assets
 170/ 16776 = .0.01 times or -1%
 The firm generated 1 LE of net income for every 100 LE of its invested assets.
 (2010- 8%) (2009- 13.90%)(2008 – 14%)
 Industry 11.5%

ROE (Return On Equity)

Net Income
 ROE =
Owners’ Equity

 Measures the profit as a percentage of owners’ equity. It tells us how well a company is
using owners’ equity to generate a profit
 Mobinil Example
 Return on Equity (ROE) = Net Income / Total Equity
 170 / 3587= 0.04 times or - 4%
 For every 100 invested by the owners they get 4 LE
 Industry 12%
 ROE is the most important ratio that explain the history and forecast the future, as from Du
Pont Identity we prove that, ROE = Profit Margin * Total Assets Turnover * Equity Multiplier
 Profit margin is a measure of the firm’s operating efficiency – how well does it control costs
 Total asset turnover is a measure of the firm’s asset use efficiency – how well does it manage
its assets
 Equity multiplier is a measure of the firm’s financial leverage
 Investors and others are frequently interested in knowing how rapidly a firm's sales can grow.
The important thing to recognize is that if sales are to grow, assets have to grow as well, at
least over the long run, so this may forecast how the company will do in the future

16
facebook.com/TamerShawerPage
 Payout and Retention Ratios
 Retention = return earning = plowback = re invested = b or RR
 Dividends = Pay out ratio = 1 –b
 could be more than 1, only if management decide to take debt to pay dividends for owners

Growth rate
A firm has two broad sources of financing, internal and external, internal financing simply refers to
what the firm earn and plow back (b) into the business, externa (sustainable) financing refer to funds
raised by either borrowing money or selling stock

Growth

Internal Sustainable

 Internal growth
The internal growth rate tells us how much the firm can grow assets using retained earnings as the
only source of financing

ROA  b
Internal Growth Rate 
1 - ROA  b

 Sustainable Growth Rate

The maximum possible growth rate for a firm that maintains a constant debt ratio and doesn’t sell
new stock.

If we mention firm growth this is must be related to leverage

g (Growth) = ROE X b

17
facebook.com/TamerShawerPage
 Time Value of Money
The phrase time value of money refers to the fact that a dollar in hand today is worth more than a dollar
promised at some time in the future.

The first thing we will study is future value, refers to the amount of money an investment will grow to over some
period of time at some given interest rate.

This interest rate may be because, inflation, risk or opportunity

For calculating any interest there are two way of calculation, simple and compound, simple mean calculating
every year the interest ratio on the initial invested money, while the compound calculate the interest value at the
end of the year on the initial invested money in addition to the interest (Interest on interest)
 Single interest
Interest earned only on the original principal amount invested
 Compound interest
Interest earned on both the initial principal and the interest reinvested from the prior periods

Future value

Cash Flow Types

Simple Compound

Single

Multiple

Annuities

Ordinary Perpetuities

Constant

Growing

18
facebook.com/TamerShawerPage
 Single cash
In the single cash, you only pay single cash at the beginning

1 1 1
PV FV

FV = PV X (1 + r) n
 FV= Future Value
 PV = Present Value
 r = interest rate
 n = number of period

We always calculate the present value, because we always estimate the future and the make
discounting to check its value now, to decide whether to invest or not.
n
PV = FV /(1+r)

Multiple cash
In the multiple cash, you pay multiple times in the beginning and at other period

1 1 1
PV FV

In this case we calculate the present value by discounting each cash flow separately

Example

1 1 1

$1,000 $2,000 $2,500

X 1/1.06
$943.40

$1780.00 X 1/1.062

$2518.86 X 1/1.063

PV = $ 5242.26, for r= 6%

19
facebook.com/TamerShawerPage
 Ordinary Annuities cash
An annuity is a constant cash flow that occurs at regular intervals for a fixed period of time

A A A

1 1 1
 1 
1 - (1 + r) n 
PV of an Annuity = PV(A, r, n) = A  
 r 
 

Where A the annuity constant cash flow value

Constant Perpetuities Annuities cash

A perpetuity is a constant cash flow at regular intervals forever.

A A A

1 1 1

A
PV of Perpetuity =
r

Growing Perpetuities Annuities cash

A growing perpetuity is a cash flow that is expected to grow at a constant rate forever

A B C

1 1 1
CF1
PV of Growing Perpetuity =
(r - g)

 where
 CF1 is the expected cash flow next year (B)
 g is the constant growth rate and
 r is the discount rate

20
facebook.com/TamerShawerPage