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International Corporate Finance (ICF)

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

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International Corporate Finance (ICF)

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  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

  3. Purpose 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

  4. Agenda • 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

  5. “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

  6. 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

  7. 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 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

  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

  9. Separation of Ownership & Control Board of Directors Management Debtholders Shareholders Debt Assets Equity

  10. Board vs. Management BoardManagement • 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

  11. 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

  12. 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)

  13. 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

  14. Life Cycle “Big Picture”

  15. 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

  16. 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 & 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)

  17. 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 Research and development expenses - 27 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

  18. 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

  19. U.S. Composite – Cash Flow FY2003 (in $ millions) Cash Flow from the Firm’s 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 Firm’s 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

  20. Cash 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!!!

  21. 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

  22. 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-(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%

  23. 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 • Analyst’s Report (NYSE:USC) Sell, don’t Short USCC 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.)

  24. 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

  25. Foreign 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)

  26. Translation 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

  27. 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

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