International Corporate Finance (ICF)

1
InternationalCorporate Finance (ICF)

• Jim Cook
• Cook-Hauptman Associates, Inc. (USA)

2
Introducing Jim Cook

• President, CEO of NASDAQ Listed Company (Software
  Tools) and on the board of two publicly held and
  numerous private companies
• President, CEO of Exxon-Mobil financed Company
  (Electronics)
• President, CEO of Globatech, Inc. in Beijing
  (Financial DB)
• Vice President, Computervision, Fortune 500
  Company (CAD/CAM)
• Taught MBAs at UCSD (Mfg. Economics), Worcester
  Polytechnic Institute (Advanced Mfg.) and
  Melbourne (Entrepreneuring)
• Consulted on management to DuPont, Motorola,
  Bell Labs,
• Invited 6 times to speak on FNN about High
  Technology investing
• Lectured on management at Harvard, MIT, Renda,
  and CAS BS math RPI, graduate math MIT, appeared
  with Jiang Ze Min on CCTV

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Purpose of these Lectures

• Next Monday you could be an able Chief Financial
  Officer of a Intl Manufacturing SME
• This weekend you will get the perspective of
  seasoned operation in the functioning of finance
• Issues of the CFO
• Raising Capital The Plan, the Package, and the
  Projections
• Capital Budgeting The Real World, Evaluating,
  and Deciding
• The Markets Analysis, Borrowing, Investing, and
  Reporting

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Agenda

• Thursday (Sessions am 830-1200, pm
  130-500)
• am Structures, Statements, Value, Analysis,
  Currency
• pm Time Currency Discounting/Trading of Money
• Friday (Sessions am 830-1200, pm 130-500)
• am Workshop on Evaluating Financials.
  Discussion of the RMB
• pm Internal Operations Cash Management
  Project Evaluation
• Saturday (Sessions am 830-1200, pm
  130-500)
• am Workshop on Financial Projections and Raising
  Capital
• pm External Operations Markets instruments and
  practices
• Sunday (Sessions am 830-1200, pm
  130-500)
• am Workshop on Mini-Cases Process, Discrete,
  Software, eBay
• pm Reviewing important points. Final Exam.
• On the Internet at http//cha4mot.com/ICF0411

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Point of View

• A point of view is or can be worth 80 IQ
  points Alan Kay
• Our Point of View
• The purpose of a company is the sustained
  appreciation of the per share value of its common
  stock! (More on this in a moment.)
• The CFO is not a cop, rather a management team
  player enabling progress and prosperity through
  creative, responsible finance
• No cash, no company! Cash is the oxygen of every
  company!
• CFOs responsibility is cash alerts, options,
  and management
• One size does not fit all Ventures ARE different
  than MNCs
• China is unique with its own Characteristics
• At the end of this course, you could begin being
  CFO

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Forms of Business Organization

• The Sole Proprietorship
• The Partnership
• General Partnership
• Limited Partnership
• The Corporation
• Advantages and Disadvantages
• Liquidity and Marketability of Ownership
• Control
• Liability
• Continuity of Existence
• Tax Considerations

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The Purpose of a Company

• The purpose of a company is the sustained
  appreciation of the per share value of its common
  stock!
• Purpose means why companies get peoples
  investment
• Sustained not just the next 3 months, but for
  years
• Appreciation means rise in value
• Per share value not the company, but the stock
• Common stock not other stock, options, or bonds
• It turns out that this leads seamlessly to
  ethical behavior
• Avoid getting into distress situations with great
  diligence
• Buy back shares when undervalued sell in hot
  market
• Conduct business legally, honorably, and
  transparently
• Develop more value day after day ignoring
  fluctuations

8
A Corporation Organization Chart
Board of Directors
Chairman of the Board and Chief Executive
Officer (CEO)
President and Chief Operating Officer (COO)
Vice President and Chief Financial Officer (CFO)
Treasurer
Controller
Cost Accounting Manager
Cash Manager
Tax Manager
Credit Manager
Financial AccountingManager
Data Processing Manager
Capital Expenditures
Financial Planning
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Separation of Ownership Control
Board of Directors
Management
Debtholders
Shareholders
Debt
Assets
Equity
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Board vs. Management

• Board
  Management
• Time Horizon 1-5 years 3-6 months
• Report Frequency Quarterly Monthly
• Reports To Shareholders Board
• Job (Offensive) Direction Performance
• Job (Defensive) Oversight Compliance
• Qualifications Minimal Maximal
• Measurement Subjective Quasi-Objective
• Structure Ad-hoc Hierarchical
• Membership 5-15 100-300

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GOVERNANCE CHART OF A BANK
PRC R e g u l a t o r s
Public Markets
Shareholders
A u d i t o r s
Board of Directors
Legends
Audit
Supervisory
Committee
Risk Mgmt.
Comm.
Answers to
Personnel
Comp.
Statutory
Public
Law
Senior Management
Investors
Insiders
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Cash Flows between Company and Markets
Company issues securities (A)
Company Invests in assets(B) Current
assetsFixed assets
Financialmarkets Short-term debt Long-term
debt Equity shares
Retained cash flows (F)
Company can buy its securities
Cash Flowfrom Co. (C)
Dividends anddebt payments (D)
Taxes
Government(E)
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Work of the CFO

• Attend to Capital Needs
• Keep the books, make the reports, shepherd the
  business plan
• Alert President of Cash Situation surprises
  immediately
• Make Business Plan for Capital Raising
• Control Capital Flows
• Monitor, administer control day-to-day
  financial transactions
• Review, monitor help projects be custodian of
  budgets
• Enforce collections and encourage (early) payment
• Be a proactive custodian of the assets and
  obligations
• Manage Capital using Markets
• Secure lines of credit, put spare cash to work
• Insure safety of cash and securities, including
  liquidity
• Get good value from all intermediaries and
  consultants

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Life Cycle Big Picture
Conceptual VIRTUAL Entrepreneurial INNOVATIVE Emerging GROWTH Established MATURE
Equity Source Angels Professionals Markets Opportunistic
Debt N/A N/A Banks Markets
Focus on Financing Sales Growth Earnings Cash Flow
Concern Birth Survival Strategic Tactical
? Sales y2y N/M 50 and up 15 - 30 5 - 10
Profitability N/M - 30 then 10 10 - 25 5 - 10
Predictability None Qualitative Moderate High
Capital Need Demo Development Growth Leverage
Agenda Start Launch Manufacture Service
? Stock N/M 3 - 6 / mo. 15 - 30 SP Index
Horizon 1 Month 1 Quarter 1 Year 5 Years
Time Line -.5 to 1 1 to 5 6 to15 15 to
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U.S. Composite Balance Sheet
FY2003 (in millions)
Liabilities (Debt)
Assets
2003
2002
and Stockholder's Equity
2003
2002
Current assets
Current Liabilities
Cash and equivalents
140
107
Accounts payable
213
197
Accounts receivable
294
270
Notes payable
50
53
Inventories
269
280
Accrued expenses
223
205
Other
58
50
Total current liabilities
486
455
Total current assets
761
707
Long-term liabilities
Fixed assets
Deferred taxes
117
104
Property, plant, and equipment
1,423
1,274
Long-term debt
471
458
Less accumulated depreciation
-550
-460
Total long-term liabilities
588
562
Net property, plant, and equipment
873
814
Intangible assets and other
245
221
Stockholders equity
Total (net) fixed assets
1,118
1,035
Preferred stock
39
39
Common stock (1 par value)
55
32
Capital surplus
347
327
Accumulated retained earnings
390
347
Less treasury stock
-26
-20
Total equity
805
725
Total assets
1,879
1,742
Total liabilities and stockholder's equity
1,879
1,742
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Balance Sheet Notes

• Mark to market means prices at market, not cost
  (not all items)
• Gains/losses of market changes are shown as
  other income
• Cash Equivalent include money market govt
  securities
• Accounts receivable are net watch changes
  carefully
• Inventories include cost and labor (WIP) watch
  changes carefully
• Property is depreciated, net of salvage, by life
  or use
• Intangibles viewed as funny money be skeptical
  of additions
• Current means in the next 12 months
• Accrued expenses are all but ordinary purchases
  and interest
• Preferred _at_ face, Common _at_ par, Treasury _at_ cost
• Retained earnings added in from the Operating
  Statement
• Whats left is the Capital Surplus (profit or
  above par on Common)

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U.S. Composite Income Statement
FY2003
(in millions)
Total operating revenues
2,262
Cost of goods sold
- 1,655
Gross margin
607
Selling, general, and administrative expenses
- 300
- 27
Research and development expenses
Depreciation
- 90
Operating income
190
Other income
29
Earnings before interest and taxes
219
Interest expense
- 49
Pretax income
170
Taxes
- 84
Current 71
Deferred 13
Net income after taxes
86
Retained earnings 43
Dividends 43
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Operating Statement Notes

• Revenues are billable goods/services sometimes
  progress est.
• In time, before Revenues, is Forecast and
  Bookings (never shown)
• Cost of Goods Sold directly proportional
  (roughly) to Revenues
• Gross Income Revenues-COGS (i.e., direct labor,
  materials, )
• Overhead costs General Administrative,
  Research Development, Marketing Sales
• Depreciation is by sum of digits, double
  declining, straight line or amortization over
  estimated useful life in time used or units made
• Other income can include net currency gain/loss
  and exceptions

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U.S. Composite Cash Flow
FY2003
(in millions)
Cash Flow from the Firms assets
Operating cash flow
238
(Earnings before interest and taxes
plus depreciation minus current taxes)
Capital spending
-173
(Change in net fixed assets
minus depreciation)
Additions to net working capital
-23
Total
42
Cash Flow to the Firms holders
Debt
36
(Interest plus retirement of debt
minus long-term debt financing)
Equity
6
(Dividends plus repurchase of
equity minus new equity financing
and minus changes to capital surplus)
Total
42
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Cash Flow Notes

• Capital Spending can be change in Fixed Assets
  Depreciation
• Additions to Net Working Capital ? (Current
  Assets CLiabilities)
• Changes in Treasury Stock reflect the net of
  sales and purchases
• Some additional sources of Financial Intelligence
• In USA, the 10-K Annual Reports has all the
  annual disclosure requirements, but 10-Q
  Quarterly Reports are very informative
• In Japan, the disclosure is best in world, but in
  Japanese
• The rating services of SP and DB give a real
  indication
• The Enron, Global Crossings, debacles means
  better disclosure
• Watch Real Estate values for long term indicators
  of local economies
• The Devils in the details READ THE NOTES TO
  FINANCIALS!!!

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U. S. Composite Financial Analysis

• Debt Ability
• Current Ratio (Current Assets)/(Current
  Liabilities) 761/486 1.57
• Quick Ratio (CA-Inventory)/(Current Liabilities)
  (761-269)/486 1.01
• Payout Ratio (Cash Dividends)/(Net Income AT)
  43/86 .50
• Retention Rate 1-(Payout Ratio) (NAT-Cash
  Dividends)/NAT .50
• Working Capital (Current Assets)-(Current
  Liabilities) 761-486 275
• Activity (Annualized Ratios)
• Asset Turns Revenues/Assets 2,262/1,879 1.20
• Receivables Turns Revenues/Receivables
  2,262/294 7.69
• Collection Period 365.25/(Receivables Turns)
  47 days
• Inventory Turns (Cost of Goods Sold)/Inventory
  1,655/269 6.15
• Days in Inventory 365/(Inventory Turns)
  365/6.03 59 days

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U. S. Composite Financial Analysis

• Financial
• Debt Ratio Debt/Assets 1,074/1,879 .57
  (small is stronger)
• Debt to Equity Debt/Equity 1,074/(1,879-1,074)
  1.33 (small is stronger)
• Equity Multiplier Assets/Equity 1,879
  /(1,879-1,074) 2.33 (leverage factor)
• Interest Coverage EBIT/Interest 219/49 4.47
  (365/4.47 82 days)
• Book Value Assets-Intangibles-Liabilities
  1,879-245-(486588) 560
• Performance
• Net Profit Margin (Net AT)/Revenues 86/2,262
  3.8 (times 2.33 8.9)
• Gross Profit Margin EBIT/Revenues 219/2,262
  9.7
• Net Return on Assets (Net AT)/Assets 86/1,879
  4.6
• Return on Net Assets (Net AT)/((Fixed
  Assets)-(Working Capital)) 10.2
• Gross Return on Assets EBIT/Assets 219/1,879
  11.7
• Return on Equity (Net AT)/Equity 86/805
  10.7
• Sustainable Growth Rate ROERetention/(1-ROE(Ret
  ention)) 6
• Dupont identity ROE (Profit Margin)(Asset
  Turnover)(Equity Multiplier)
• 
  3.8 1.20 2.33 10.7

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U. S. Composite Market Analysis

• Assumptions (29 million Common Shares Price per
  share 29.75)
• Earnings per share (Net AT)/Shares (86
  million)/(29 million) 2.97
• Price to Earnings ratio P/E
  (Price/share)/(Earnings/share) 29.75/2.97
  10
• Dividend per share (Cash Dividend)/Shares
  43/29 1.48
• Yield Dividend/Price 1.48/29.75 5
• Capitalization (Price per share) Shares
  29.75 29 Million 862,750,000
• Capitalization to Book Value Ratio
  Capitalization/(Book Value) 862/560 1.54
• Analysts Report (NYSEUSC) Sell, dont Short
• USCC is a mediocre company, through and through.
  It seems intent on maintaining its status quo
  the SP Index outperforms USC on a consistent
  basis. It should be said that USC is
  responsible retiring debt, paying dividends,
  improving payables, and reducing inventory. At
  present, their Receivable are not yet a flag, but
  rather, a general reflection of the economic
  slowdown. USCs Cost of Goods Sold (73)
  suggests that their manufacturing operations are
  not as efficient as they should be. Their P/E
  ratio of 10 is consistent with this opinion.
  (Disclaimer This is written without benefit of
  industry norms and history, which, I know, should
  never be done.)

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Translation Currencies

• Currency of Books and Records (CBR)
• the currency of the foreign financial
  statements
• Functional Currency (FC)
• the currency generally used to buy, sell,
  borrow, repay, etc.
• Reporting Currency (RC)
• the currency of the financial statements

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Foreign Currency Translation

• Temporal Method (Operating Statement
  reconciliation)
• Cash, receivables, payables _at_ closing day
  (exchange) rate
• Others assets/liabilities rate _at_ time of
  transaction
• Revenue and expense items _at_ average period rate
• All translation gains/losses reported on
  operating statement
• Use if reporting currency (RC) is functional
  currency (FC)
• Current Rate Method (Balance Sheet
  reconciliation)
• All assets liabilities translated _at_ current day
  (exchange) rate
• Net worth translated _at_ historic rates
• Revenues expenses _at_ average period rates
• All translation gains/losses reported on
  stockholders equity
• Use if functional currency is currency of books
  records (CBR)

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Translation Situations

• Billed in Yen, but not paid yet (AR)
• Recorded _at_ current rate, but paid at a different
  rate
• The difference, if accepted, must be recorded as
  gain/loss
• Temporal Method, no change to balance sheet, just
  earnings
• Current Method, translation change under
  Liabilities
• You buy equipment from Overseas
• When you pay, your currency weakened i.e., costs
  you more
• Temporal Method says you lost money that period
  by not paying
• Current Method says that your new equipment costs
  more

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Concluding Remarks

• Questions and Answers
• Thank you, again.
• You can find a copy of this lecture (150 KB) on
  the Internet at
• http//cha4mot.com/ICF0411