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

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Brokers Awareness program

(4)

Dr. Mounther Barakat

Securities and Commodities Authority

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برنامج توعية الوسطاء اللقاء الرابع

د. منذر بركات العمري

هيئة االوراق المالية والسلع

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The Annual Reportالسنوي التقرير

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.

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Balance Sheet: Assetsاالصول - المالي المركز قائمة

CashA/RInventories

Total CAGross FALess: Dep.

Net FATotal Assets

20067,282

632,1601,287,3601,926,8021,202,950 263,160 939,7902,866,592

200557,600

351,200 715,2001,124,000

491,000 146,200 344,8001,468,800

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Balance sheet: Liabilities and Equityالملكية – وحقوق الخصوم المالي المركز قائمة

Accts payableNotes payableAccruals

Total CLLong-term debtCommon stockRetained earnings

Total EquityTotal L & E

2006524,160

636,808 489,6001,650,568

723,432460,000

32,592 492,5922,866,592

2005145,600200,000

136,000481,600323,432460,000

203,768 663,7681,468,800

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Income statementالدخل قائمة

SalesCOGSOther expenses

EBITDADepr. & Amort.

EBITInterest Exp.EBTTaxesNet income

20066,034,000

5,528,000 519,988

(13,988) 116,960(130,948) 136,012(266,960) (106,784) (160,176)

20053,432,0002,864,000 358,672

209,328 18,900

190,428 43,828

146,600 58,640

87,960

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Other dataأخرى معلومات

No. of sharesEPSDPSStock price

2006100,000-$1.602

$0.11$2.25

2005100,000

$0.88$0.22$8.50

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Did the expansion create additional net operating after taxes (NOPAT)?

الضريبة بعد التشغيلي الدخل حسابات

NOPAT = EBIT (1 – Tax rate)

NOPAT06 = -$130,948(1 – 0.4)

= -$130,948(0.6)= -$78,569

NOPAT05 = $114,257

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What effect did the expansion have on net operating working capital?

العمل المال رأس صافي حسابات

NOWC = Current - Non-interest

assets bearing CL

NOWC06 = ($7,282 + $632,160 + $1,287,360) – ( $524,160 + $489,600)

= $913,042

NOWC05 = $842,400

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What effect did the expansion have on operating capital?

التشغيلي المال رأس حسابات

Operating capital = NOWC + Net Fixed Assets

Operating Capital06 = $913,042 + $939,790

= $1,852,832

Operating Capital05 = $1,187,200

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What is your assessment of the expansion’s effect on operations?

التشغيل حسابات من مالحظات

Sales

NOPAT

NOWC

Operating capital

Net Income

2006 $6,034,000

-$78,569$913,042

$1,852,832-$160,176

2005 $3,432,00

0$114,257$842,400$1,187,20

0$87,960

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What was the free cash flow (FCF) for 2002?الحر النقدي التدفق حساب

FCF06 = NOPAT – Net capital investment

= -$78,569 – ($1,852,832 - $1,187,200)

= -$744,201

Is negative free cash flow always a bad sign?

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Economic Value Added (EVA)المضافة القيمة حساب

EVA = After-tax __ After-tax

Operating Income Capital costs

= Funds Available __Cost of

to Investors Capital Used

= NOPAT – After-tax Cost of Capital

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EVA Conceptsالمضافة االقتصادية القيمة مفهوم

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.

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What is the firm’s EVA? Assume the firm’s after-tax percentage cost of capital was 10% in 2000 and 13% in 2001.

المضافة االقتصادية القيمة حساب

EVA06 = NOPAT – (A-T cost of capital) (Capital)

= -$78,569 – (0.13)($1,852,832)

= -$78,569 - $240,868

= -$319,437

EVA05 = $114,257 – (0.10)($1,187,200)

= $114,257 - $118,720

= -$4,463

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Did the expansion increase or decrease MVA?المضافة السوقية القيمة حساب

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.

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Calculating Key Multipliersالمضاعفات مثال - حساب

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

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Calculating Key Multipliersمثال - المضاعفات حساب

M/B = Mkt price per share / Book value per share= $12.17 / ($1,952 / 250) = 1.56x

2007* 2006 2005 Ind.

P/E 12.0x -1.4x 9.7x 14.2x

P/CF 8.21x -5.2x 8.0x 11.0x

M/B 1.56x 0.5x 1.3x 2.4x

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Analyzing the multipliersالمضاعفات تحليل

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.

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Trend analysisالنمطية تحليل

Analyzes a firm’s financial ratios over time

Can be used to estimate the likelihood of improvement or deterioration in financial condition.

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Potential uses of freed up cashالحر النقدي التدفق استخدامات

Repurchase stock Expand business Reduce debt All these actions would likely improve the

stock price.

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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 Tradingبالهامش االتجار

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Margin Tradingاالتجار بالهامش

XYZ is now selling at DHS10. You have DHS5000 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.

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Assets DHS Liabilities & Equity

DHS

1000 shares @ 10

10000

Loan 5000

Equity 5000

TA 10000

TC 10000

Price @ DHS10

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DHS

1000 shares @ 11

11000 Loan 5000

Equity 6000

TA 11000 TC 11000

Price up by 10% @ DHS11

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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%


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DHS

1000 shares @ 9

9000 Loan 5000

Equity 4000

TA 9000 TC 9000

Price down by 10% @ DHS9

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R= (9000-10000)/10000= -10%. With margin:

R= (4000- 5000)/ 5000= -20%. Your margin is

4000/9000=44.44%


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The minimum price before hitting the first margin call is:

P=(IM*P0)/(1-MM)

In our example:P=(.5*10)/(1-.375)=8

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DHS

1000 shares @ 8

8000 Loan 5000

Equity 3000

TA 8000 TC 8000

Price @ DHS11 which the margin call price.

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R= (8000-10000)/10000= -20%. With margin:

R= (3000- 5000)/ 5000= -40%. Your margin is

3000/8000=37.5%

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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-EqCash= 8*1000*0.5-3000

= 1000

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DHS

1000 shares @ 8

8000 Loan 5000

Cash 1000 Equity 4000

TA 9000 TC 9000

Your margin now is: M=Eq/Inv. =

4000/8000= 50% back to IM.

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See XLS file for further training

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Short Selling and Marginsالهامش 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.

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XYZ is now selling at DHS10. 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.

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DHS

Cash from selling 1000 shares @ 10

10000 Liability (short position)

10000

Cash required as a margin

5000 Equity 5000

TA 15000 TC 15000

Price @ DHS10

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DHS



10500


5000 Equity 4500

TA 15000 TC 15000

Price up by 5% @ DHS10.50

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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%


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Price down by 5% @ DHS9.5


DHS



9500


5000 Equity 5500

TA 15000 TC 15000

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Without short selling: R=(9500-10000)/10000=-5%.

With short selling: R=(5500-5000)/5000=10%.

Your margin is 5500/9500=57.89%


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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

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Price @ DHS10.909


DHS



10909


5000 Equity 4091

TA 15000 TC 15000

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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%

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Price @ DHS12


DHS



12000


5000 Equity 3000

TA 15000 TC 15000

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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.

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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 toCurrent 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.

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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

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See XLS file for further training

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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فصل الحسابات What is the difference between the current informal

lending and the lending under SCA regulations?Under current practice Under regulations The current lending is not allowed, it is not the brokers job.

Brokers are legally allowed to lend to customers to purchase securities

There are no liquidity guarantees to meet cash withdrawals

Such guarantees are embedded in the system

There are no capital adequacy rules in place

Adequacy rules will be in place and will be enforced to protect investors money

Current lending practices are very risky and can cause a disaster under very small liquidity strains

Lending will be more secure and mechanisms will be in place to keep things safe

There are no rules to ensure fair and equitable lending, personal connections rule lending

Lending is fair and equitable

Current lending can lead to improper practices like forcing unnecessary trading to make up for lending risk and lending compensations through generating transaction fees to generate income.

Income is generated in a safe and structured manner

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الحسابات فصل

Under the regulations things will be:

Organized Safe Fair And controllable

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Market Makingصناع السوق

Evidence shows that two of the main problems that emerging markets face are: Capital supply shortage and low liquidity

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Market Makingصانع السوق

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Documents

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