Financial instrument, made easy

1
Financial instrument, made easy

• Khaled Samir,MD
• Certified Corporate Governance

2
Cash Flow Statement ????? ???????? ???????
TR Total Revenue ?????? ?????
-Expenses -Depreciation
EBT Earning Before Tax
-Tax
NI ???? ????? Net income
Depreciation ???????
CF Cash Flow
3
Cash instruments
Derivative Instruments
Common stock Preferred Stock Bonds
Options Future Commitment
Financial Instruments
CF Cash Flow
Cash Flow Statement ????? ???????? ???????
4
Takeaways
1/3
By the end of this presentation ,you should be
able to

• Identify and describe the basic features of bond
  such as maturity, par value, coupon rate,
  provision for redeeming, option granted to issuer
  or investor.

Define and identify characteristics of bonds,
common stock, stock dividends and preferred stock
5
Takeaways
2/3
By the end of this presentation ,you should be
able to
Identify and discuss the factors that influence
the dividend policy of the firm
Define the different types of dividends,
including cash dividends , and stock splits
6
Takeaways
3/3
By the end of this presentation ,you should be
able to
Demonstrate an understanding of options future
commitment

• Sources of Intermediate-term financing
• Lease financing
• Operating sales
• Finance leases ( installment purchase IPO Initial
  public offering ???????? ?????

7
Financial ratio to evaluate Capital structure
finance
1/4

• Leverage ratios measure the firms use of debt to
  finance assets and operations
• Debt-to-Equity ratio Debt/Equity
• Equity ratio Common shareholders
  Equity/Assets
• Debt ratio Liabilities/Assets
• Time-interest-earned Net income Interest
  expense Income tax /Interest expense
• Profitability ratios measure income in relative
  basis and the firm earning power
• Profit margin on sales Net income/Sales
• Return on assets Net income/Assets
• Du Pont ratio NI/sales X sales/Assets
• Per-share rations are the company financial
  information to each shareholder
• EPS Earning per share NI available to common
  stockholders / share out standing
• Book value per share Shareholders
  equity/shares outstanding
• Dividend yield Dividend per share / Market
  value per share
• Price-earning ratio Market price / EPS

8
Leverage ratios
2/4

• Measure the firms use of debt to assets
• Debt-to-Equity ratio Debt / Equity

9
Profitability ratios
3/4

• Measure income in relative basis and the firm
  earning power
• Profit margin on sales Net income/Sales

10
Per-share rations
4/4

• Are the company financial information to each
  shareholder
• EPS Earning per share
• NI available to common stockholders / share out
  standing
• ???? ????? / ??? ?????? ???????

11
Sources of long-term financing
1/2

• Introduction
• A firm may have long-term financing requirements
  that it cannot or does not want to meet using
  retained earnings RE.
• It must therefore issue equity or debt
  securities .
• ?? ???? ???? ???????? ????? ???? ?????? ???? ??
  ?? ???????? ??? ?? ?????? ?????????? ???
  ????????? ???????? ??????? ???????? ??????
  ??????. ????? ?????? ???? ???? ??? ????? ?? ????
  ?????? ??????? ?? ???????? ?? ????? ????? ?????..

12
Sources of long-term financing
2/2
Three options are there 1- C/S common stocks
?????? ??????? 2- P/S preferred stock ??????
???????? 3- Bonds
??????? ???????
13
Cost of Finance

• The principle issues regarding financing are the
  cost of each type of financing (including the
  question of risk).

14
C/S Common Stock ?????? ???????
1/7

• Par value ,
• Adv and Disadvantage ,
• Preemptive rights ,
• stock warrants.

15
Par value
2/7

• the stocks par value represent legal capital. It
  is an arbitrary value assigned to stock before
  the stock is issued. It also represent the
  maximum liability of a shareholder
• ?? ???? ?????? ??????? ???????? ????? ?????????
  ?????? ???????? ??? ????? ?????? ? ???????
  ?????????? ?????? ????? ????? ?????

16
Common Stock C/S
3/7

• Ownership involves risk because holders of common
  stock are not guaranteed a return and are last in
  priority in a liquidation. Shareholders capital
  provides the cushion for creditors if any losses
  occur on liquidation.

17
Common Stock C/S
4/7

• Advantages to the issuer
• Dividends are paid from the profit when available
• There is no fixed maturity date ????? ?????????
  for repayment of the capital
• The sale of common stock increases the
  creditworthiness of the firm by providing more
  equity
• Common stock is frequently more attractive to
  investor than debt because it grows in value with
  success of the firm

18
Common Stock C/S
5/7

• Disadvantages to the issuer
• Control (voting rights) is diluted
• New common s tock dilute earnings available to
  existing shareholders
• ??? ?? ???? ????? ????? ?? ????????? ??????
  ???????
• Underwriting costs are typically higher for
  common stock outstanding
• ???? ????? ????? ?????? ?????
• Cash dividends on common stock are not deductible
  as an expense and are after-tax cash deductions
  to the firm but not to individual
• ??? ??????? ????? ?????? ?? ????? ????? ????????

19
Common stocks rights and warrants
6/7

• Pre-emptive rights?? ?????? Give the common
  stock holders the right to purchase any
  additional stock issuances
• Then the rights can be sold separately , value
  of stock right ??? " ???? ???? ??????" is Value
  of share right_on Subscription price of a share
  / Number of rights needed to buy a share 1

20
Common stocks warrants
7/7

• Stock warrants ( certificates evidencing options
  to buy stock at a given price within certain
  period )

21
Preferred Stock P/S

• Is a hybrid ???? ??of debt and equity. It has a
  fixed charge and increases leverage, but payment
  of dividedness is not an obligation. Also,
  preferred shareholders stand ahead of common
  shareholders in priority in the event of
  corporate bankruptcy.
• Typical provisions of preferred stock
• Priority in assets and earning
• Accumulation of dividends
• Convertibility
• Participation
• Redeemability
• Voting rights
• Maturity

22
Bonds ???????
1/5

• Are long-term debt instruments. They are similar
  to term loans except that they are usually
  offered to the public and sold to many
  investors. Bonds are sold at the sum of the
  present values of maturity amount and the
  interest payments
• Advantages
• Basic control of the firm is not shared with the
  debt holder
• Cost of debt is limited
• Ordinarily , the expected yield of bond is lower
  than the cost of common stock
• Interest paid on debt is tax deductible as an
  expense.
• Disadvantages
• The debt has a fixed charge
• Debt add risk to the firm
• It usually has a maturity date
• Debt is a long-term commitment

23
Types of bonds
2/5

• A mortgage
• A debenture
• An income
• Zero-coupon

• International are of two types
• Eurobonds
• Foreign bonds

24
Types of bonds
3/5

• A mortgage bonds Is a pledge of certain assets
  for a loan. It is usually secured by real
  property as a condition of the loan
• A debenture bonds Is a long-term loan not secured
  by specific property .It is a general obligation
  of the borrower. Only companies with the best
  credit rating can issue debentures because
  holders will be general creditors.
• An income bonds Pays interest only if the issuing
  company has earnings. This is more riskier than
  other bonds

25
Types of bonds
4/5

• Zero-coupon bonds pay no interest but sell at a
  deep discount from their face amount. It is a
  relatively new tools but very useful for
  investors and investees. The investors know the
  exact return on a zero-coupon bond.
• International bonds are of two types
• Eurobonds Are denominated in a currency other
  than that of the nation where they are sold.
• Foreign bonds Are denominated in the currency of
  the nation in which they are sold

26
Bonds rating ??????? ? ??????? ?????? ??????
?????
5/5

• The correlation between the bond rating ( base
  on risk ) and the interest rate that is
  attractive to an investor tends to be inverse.
• A high rating ( low risk ) will lead to low
  interest rate.

27
Derivatives ???????? ???????
1/6

• Derivative Is defined informally as an investment
  transaction in which the buyer purchases the
  right to a potential gain with Option and
  futures

28
Derivatives ????????
2/6

• ???????? ?? ???? ????? ? ???? ?? ???? ????????
  ????? ???? ? ???? ?? ???? ???????

29
Types of derivatives
3/6

• Options
• Call Options
• Put Options

• Future commitment

30
Options
4/6

• Is a contract that give the owner to Buy or Sell
  assets ?????? at a fixed price at any moment in
  time before or on a specific date
• Two types of Options
• To Buy Call Option
• To Sell Put Option

31
5/6
Call Option
Put Option
32
Future commitment
6/6

• Is a definite agreement that allows a trader to
  purchase or sell an asset at a fixed price during
  a specific future month ( not a specific date )
• It is standard , exchange traded , active
  secondary market, regulated, backed by clearing
  house ??? ??????? and adjusted profit and loss
  daily.
• Usually results in net settlement ?????? ?????
  rather than a physical delivery

33
Dividend Policy ????????? ???????
1/2

• Determines what portion of a corporations net
  income is distributed to shareholders and what
  portion is retained for reinvestment
• A high dividend rate means a slower rate of
  growth
• Because both of high growth rate and high
  dividends distribution is required the
  financial manager attempts to achieve the balance
  that maximizes the firms share price.

34
Factors influence a companys dividend policy
2/2

• Legal restrictions
• Stability of earnings
• Rate of growth
• Cash position
• Restriction in debt agreement
• Tax position of shareholders
• Residual theory of dividends

35
Other sources of Long-term financing

• IPO Initial Public offering ???????? going
  public A firms issuance of securities to the
  public is called Initial public offering, known
  as going concern. When a firm goes public , it
  issues its securities on a new issue or IPO
  market ( primary market ).
• Venture capital firms invest in new enterprise
  that might not be able to obtain funds in the
  usual capital markets due to the riskness of the
  project.

36
Thank You
Financial instrument, made easy
Khaled Samir,MD
Questions?
37
Common stocks rights

• may be given to employees as compensation. E.g.
  if the market price??? ????? is 50 per share,
  the subscription price ??? ??????? is 40 per
  share, and 3 rights are necessary to buy an
  additional share of stock, the theoretical market
  value of one right used to buy the stock prior to
  ex-rights date is
• Market price - subscription price / Number of
  rights 1 therefore
• 50-40/312.5 and the theoretical value of stock
  when it goes ex-right is 47.5 ( 50-2.5)

38
Call Option
Put Option
39
finance lease

• A finance lease effectively allows a firm to
  finance the purchase of an asset, even if,
  strictly speaking, the firm never acquires the
  asset. Typically, a finance lease will give the
  lessee control over an asset for a large
  proportion of the asset's useful life, providing
  them the benefits (and risks) of ownership.

40
An operating lease

• is a lease whose term is short compared to the
  useful life of the asset or piece of equipment
  (an airliner, a ship etc.) being leased. An
  operating lease is commonly used to acquire
  equipment on a relatively short-term basis. Thus,
  for example, an aircraft which has an economic
  life of 25 years may be leased to an airline for
  5 years on an operating lease.
• An operating lease meets all requirements of FASB
  13
• In the context of cars and other passenger
  vehicles, under an operating lease the lessor
  leases the vehicle to the lessee for a fixed
  monthly amount, and also assumes the residual
  value risk of the vehicle. This provides a way to
  lease a vehicle where the cost of the vehicle is
  known in advance - however, operating leases can
  be an expensive option as there is a risk premium
  priced into the monthly repayments.

41
Benefits

• There are No financial risks, No administration
  costs and No credit risks to your company in
  implementing the Operating Lease program. The
  Finance Program is managed by Operating Lease in
  partnership with your company.

42
Redemption value

• Redemption value is the price at which the
  issuing company may choose to repurchase a
  security before its maturity date.1
• A bond is purchased at a discount if its
  redemption value exceeds its purchase price. It
  is purchased at a premium if its purchase price
  exceeds its redemption value.1

43
coupon rate

• The coupon or coupon rate of a bond is the amount
  of interest paid per year expressed as a
  percentage of the face value of the bond.

44
Stock Warrant

• Option to purchase a certain number of shares at
  a stated price for a specified time period at a
  subscription price that is higher than the
  current market price (properly called
  subscription warrant). A warrant may or may not
  come in a one-to-one ratio with the stock already
  owned. Unlike a put or call option, a warrant is
  usually good for several years some, in fact,
  have no maturity date and are known as perpetual
  warrants. Warrants are often given as sweeteners
  for a bond issue (e.g., to lower the interest
  rate or enhance the marketability). Warrants
  included with a bond may also exist in a merger
  when the acquiring company offers cash plus
  warrants in exchange for voting common stock of
  the acquired business. Generally, warrants are
  detachable from the bond and have a market life
  of their own. Warrants pay no dividends nor do
  they have voting rights. The warrant enables the
  holder to take part indirectly in price
  appreciation.

45
Lease Structures

• Operating Lease
• Capital Lease
• True Lease
• Conditional Sales Contract
• Note and Security Agreement
• Option Lease
• Tax Lease
• Finance Lease