international corporate finance (icf)
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International Corporate Finance (ICF). Jim Cook Cook-Hauptman Associates, Inc. (USA). Introducing Jim Cook. President, CEO of NASDAQ Listed Company (Software Tools) and on the board of two publicly held and numerous private companies - PowerPoint PPT PresentationTRANSCRIPT
InternationalInternationalCorporate Finance (ICF)Corporate Finance (ICF)
Jim Cook
Cook-Hauptman Associates, Inc. (USA)
Day 1 in the am # 2 / 27International Corporate Finance
Introducing Jim CookIntroducing 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
Day 1 in the am # 3 / 27International Corporate Finance
Purpose of these LecturesPurpose of these Lectures
Next Monday you could be an able Chief Financial Officer of a Int’l 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
Day 1 in the am # 4 / 27International Corporate Finance
AgendaAgenda Thursday – (Sessions am: 8:30-12:00, pm: 1:30-5:00)
am: Structures, Statements, Value, Analysis, Currency pm: Time & Currency Discounting/Trading of Money
Friday – (Sessions am: 8:30-12:00, pm: 1:30-5:00) am: Workshop on Evaluating Financials. Discussion of the RMB pm: Internal Operations: Cash Management & Project Evaluation
Saturday – (Sessions am: 8:30-12:00, pm: 1:30-5:00) am: Workshop on Financial Projections and Raising Capital pm: External Operations: Markets’ instruments and practices
Sunday – (Sessions am: 8:30-12:00, pm: 1:30-5:00) am: Workshop on Mini-Cases: Process, Discrete, Software, eBay pm: Reviewing important points. Final Exam.
On the Internet at: http://cha4mot.com/ICF0411
Day 1 in the am # 5 / 27International Corporate Finance
““Point of View”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! CFO’s 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
Day 1 in the am # 6 / 27International Corporate Finance
Forms of Business OrganizationForms 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
Day 1 in the am # 7 / 27International Corporate Finance
The Purpose of a CompanyThe 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 people’s 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
Day 1 in the am # 8 / 27International Corporate Finance
A Corporation Organization ChartA Corporation Organization Chart
Cash Manager Credit Manager
Capital Expenditures Financial Planning
Treasurer
Tax Manager Cost Accounting Manager
Financial AccountingManager
Data Processing Manager
Controller
Vice President and Chief Financial Officer (CFO)
President and Chief Operating Officer (COO)
Chairman of the Board and Chief Executive Officer (CEO)
Board of Directors
Day 1 in the am # 9 / 27International Corporate Finance
Separation of Ownership & ControlSeparation of Ownership & Control
Board of Directors
Management
AssetsDebt
Equity
Shareholders
Debtholders
Day 1 in the am # 10 / 27International Corporate Finance
Board vs. ManagementBoard 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
Day 1 in the am # 11 / 27International Corporate Finance
GOVERNANCE CHART OF A BANKGOVERNANCE CHART OF A BANK
Senior Management
Board of Directors
Public & Markets ShareholdersPRC
Regu la to rs
Aud i t o r s
SupervisoryAudit
Risk Mgmt.
Personnel
Statutory
Comm.
Comp.
Legends:
Answers to
Committee
PublicLaw
InvestorsInsiders
Day 1 in the am # 12 / 27International Corporate Finance
Cash Flows between Company and MarketsCash Flows between Company and Markets
Tax
es
Company Invests in
assets(B)
Current assetsFixed assets Cash Flow
from Co. (C)
Financialmarkets
Short-term debtLong-term debtEquity shares
Government(E)
Company issues securities (A)
Retained cash flows (F)
Dividends anddebt payments (D)
Companycan buy itssecurities
Day 1 in the am # 13 / 27International Corporate Finance
Work of the CFOWork 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
Day 1 in the am # 14 / 27International Corporate Finance
ConceptualVIRTUAL
EntrepreneurialINNOVATIVE
EmergingGROWTH
EstablishedMATURE
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% S&P Index
Horizon 1 Month 1 Quarter 1 Year 5 Years
Time Line -.5 to 1 1 to 5 6 to15 15 to …
Life Cycle “Big Picture”Life Cycle “Big Picture”
Day 1 in the am # 15 / 27International Corporate Finance
U.S. Composite U.S. Composite – Balance Sheet– Balance Sheet
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
FY2003(in $ millions)
Day 1 in the am # 16 / 27International Corporate Finance
Balance Sheet NotesBalance 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 & gov’t 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 @ face, Common @ par, Treasury @ cost Retained earnings added in from the Operating Statement What’s left is the Capital Surplus (profit or above par on Common)
Day 1 in the am # 17 / 27International Corporate Finance
U.S. Composite U.S. Composite – Income Statement– Income Statement
Total operating revenues $2,262Cost of goods sold - 1,655
Selling, general, and administrative expenses - 300
Depreciation - 90Operating income $190Other income 29Earnings before interest and taxes $219Interest expense - 49Pretax income $170Taxes - 84 Current: $71 Deferred: $13Net income after taxes $86 Retained earnings: $43 Dividends: $43
FY2003 (in $ millions)
Gross margin $607
- 27Research and development expenses
Day 1 in the am # 18 / 27International Corporate Finance
Operating Statement NotesOperating 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
Day 1 in the am # 19 / 27International Corporate Finance
U.S. Composite U.S. Composite – Cash Flow– Cash Flow
Cash Flow from the Firm’s assetsOperating 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 $42Cash Flow to the Firm’s holdersDebt $36 (Interest plus retirement of debt minus long-term debt financing)Equity 6
equity minus new equity financing
Total $42
FY2003 (in $ millions)
and minus changes to capital surplus)
(Dividends plus repurchase of
Day 1 in the am # 20 / 27International Corporate Finance
Cash Flow NotesCash Flow Notes
Capital Spending can be change in Fixed Assets + Depreciation Additions to Net Working Capital = Δ (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 S&P and D&B give a real indication The Enron, Global Crossings, … debacles means better disclosure Watch Real Estate values for long term indicators of local economies
The Devil’s in the details: READ THE NOTES TO FINANCIALS!!!
Day 1 in the am # 21 / 27International Corporate Finance
U. S. Composite U. S. Composite – Financial Analysis– 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
Day 1 in the am # 22 / 27International Corporate Finance
U. S. Composite U. S. Composite – Financial Analysis– 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-(486+588) = 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: ROE*Retention/(1-ROE*(Retention)) = 6%
Dupont identity: ROE = (Profit Margin)*(Asset Turnover)*(Equity Multiplier) = 3.8% * 1.20 * 2.33 = 10.7%
Day 1 in the am # 23 / 27International Corporate Finance
U. S. Composite U. S. Composite – Market Analysis– 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
Analyst’s Report (NYSE:USC) Sell, don’t ShortUSCC is a mediocre company, through and through. It seems intent on maintaining
its status quo; the S&P 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. USC’s 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.)
Day 1 in the am # 24 / 27International Corporate Finance
Translation CurrenciesTranslation 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
Day 1 in the am # 25 / 27International Corporate Finance
Foreign Currency TranslationForeign Currency Translation
Temporal Method – (Operating Statement reconciliation) Cash, receivables, payables @ closing day (exchange) rate Others assets/liabilities rate @ time of transaction Revenue and expense items @ 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 @ current day (exchange) rate Net worth translated @ historic rates Revenues & expenses @ average period rates All translation gains/losses reported on stockholders’ equity Use if functional currency is currency of books & records (CBR)
Day 1 in the am # 26 / 27International Corporate Finance
Translation SituationsTranslation Situations
Billed in Yen, but not paid yet (AR) Recorded @ 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