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  • Value of recording data in a consistent / standard format – losses, audit, KRI’s, external events – concentrations Once set up standard categorisation, it is important to then define what you mean, with examples, so that you get a consistent interpretation. Important if rolling out program across many branches / business groups
  • 53 51 Discussing the US requirements here, but most jurisdictions follow this approach to a greater or lesser extent
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Fundamentals of Financial Markets Fundamentals of Financial Markets Presentation Transcript

  • Alicorn Consulting (Nigeria) Limited
  • Alicorn Consulting Limited Fundamentals Of Financial Markets National Pension Commission, Abuja March-April, 2011
  • [Day 1]
    • Section 1: Background to Financial Markets & Environment
    • Part A
    • The Financial System & Environment
    • Understanding and interpreting macroeconomic variables
    • Monetary and Fiscal Policy
    • Capital & Money Markets
    • Money & Banking System
    Training Course Outline
    • Section 1: Background to Financial Markets & Environment
    • Part B
    • Participants in the Nigerian Financial Markets
    • Regulatory Agencies in the Nigerian Financial Markets
    • Banks’ Clearing and Settlement Systems in Nigeria
    • Features of Financial Assets & Liabilities
    Training Course Outline
  • The Financial System – at a glance Personal Corporate Government Savings = Investment Money & Capital Markets Intermediation Personal Corporates Government Savings = Investment Corporates Government Banks Brokers Insurance/Re-Insurance
  • The Financial System & Environment
    • To understand the financial system, we start by looking at the flow of funds within an economy.
    • Flow of funds describes the movement of funds or money/capital between one group of entity or institutions in the economic system and other groups.
    • Why?
    • Necessitated by the need of those who do not have enough funds for investments/production ( the deficit productive unit ) to obtain funds from those who have excess funds to spend ( the surplus spending unit ).
    • Available funds in an economy can be transmitted to
    • firms that require funds in three ways :
    • Through financial institutions that accepts savings/deposits and same make available to those needing funds for production and development.
    • Through the financial markets i.e. organized system where the suppliers and demanders of various types of funds can negotiate transactions
    • Through private arrangements/placements.
    The Financial System & Environment
  • Macroeconomic Variables & Nigeria Economy …looking back and ahead
  • Understanding & Interpreting Macroeconomic Variables
    • Key Macroeconomic Variables
      • Gross Domestic Products
      • Gross National Products
      • Population Size & Growth Rate
      • Inflation Rate
      • Unemployment Rate
      • Exchange Rate
      • Interest Rate
      • Monetary Policy Rate
      • Prime Lending Rate
  • Key Economic Variables & Market Performance: 2000 – 2007
    • Economic Growth Indicators
      • Foreign Direct Investment & Foreign Portfolio Investment .
      • Prime lending rate
      • Exchange rate
      • Inflation rate
    Population growth rate
    • Market Performance Observed
      • Year End Market Capitalization
      • NSE Index Return.
    Market Dividend Yield
  • Key Economic Variables & Market Performance: 2008(Q4)
    • Economic Growth Indicators
      • Foreign Direct Investment & Foreign Portfolio Investment .
      • Prime lending rate
      • Exchange rate
      • Inflation rate
    Population growth rate
    • Market Performance Observed
      • Year End Market Capitalization
      • NSE Index Return.
    Market Dividend Yield
  • Key Economic Variables & Market Performance: 2009
    • Economic Growth Indicators
      • Foreign Direct Investment & Foreign Portfolio Investment .
      • Prime lending rate
      • Exchange rate
      • Inflation rate
    Population growth rate
    • Market Performance Observed
      • Year End Market Capitalization
      • NSE Index Return.
    Market Dividend Yield
  • Key Economic Variables & Market Performance: 2010
    • Economic Growth Indicators
      • Foreign Direct Investment & Foreign Portfolio Investment .
      • Prime lending rate
      • Exchange rate
      • Inflation rate
    Population growth rate
    • Market Performance Observed
      • Year End Market Capitalization
      • NSE Index Return.
    Market Dividend Yield
  • Key Economic Variables & Market Performance Outlook: 2011
    • Economic Growth Indicators
    ?
      • Foreign Direct Investment & Foreign Portfolio Investment .
    ?
      • Prime lending rate
      • Exchange rate
      • Inflation rate
    Population growth rate
    • Market Performance Observed
      • Year End Market Capitalization
      • NSE Index Return.
    Market Dividend Yield
  • Understanding Fiscal & Monetary Policy
  • The Central Bank of Nigeria
    • Central Bank Monetary Policy reforms
      • Establishment of a new Monetary Policy Department to refocus CBN on its primary (core) mandate.
      • Daily liquidity forecasting for effective liquidity management
      • Generation of daily CBN Balance Sheet
      • Support to National Bureau of Statistics (NBS) for timely provision of Statistics - to assist in Monetary Policy setting and implementation.
    • Revamping of monetary targeting as framework for monetary policy
      • Adoption of medium- term monetary policy programme
      • Enhanced transparency in the conduct of monetary policy
      • Effective Communication
    • Zero tolerance to Ways and Means advances to Government at all levels.
    • Sterilisation of crude oil receipts above the benchmark price.
    Monetary & Fiscal Policies
  • Monetary & Fiscal Policies
    • The Banking Industry: Recent Agenda
      • Increased bank capital base from N2 billion to N25 billion through:
        • M&A activities in the banking sector
        • injection of fresh capital via the capital market
      • Adoption of risk-focused and rule-based regulatory framework
      • Automation of the banking system through e-FASS and RTGS
      • Establishment of an Assets Management Company as an important element of distress resolution
      • Corporate Governance code
    • Elements Of Reforms - Reserves & Exchange Rate Management
    • Full liberalisation of foreign exchange market
    • Foreign exchange market liberalisation through ( admission of Bureaux de Change into official foreign exchange market).
    • Relatively easier access to foreign exchange by end users
    • External Management of external reserve
    Monetary & Fiscal Policies
    • Elements Of Reforms - Reserves & Exchange Rate Management
    • Strategic Partnership between Nigerian banks and International Asset Managers for managing Nigeria’s Foreign Exchange Reserves
    • Standardized/Uniformed checking standards and promote use of cheques
    • Promote e-payments system
    • Enforcement of Anti-Money Laundering Laws and Rules across the financial system.
    Monetary & Fiscal Policies
  • Understanding the Nigerian Money & Capital Markets
  • Financial Institutions Financial Institutions are intermediaries that channel the savings/deposits/investments of individuals, businesses and governments to productive use.   Financial Markets Made up generally of: ·        Money Markets - short-term funding Markets ·        Capital Markets - long-term funding Markets Money & Capital Markets
  • MAJOR FINANCIAL INSTITUTIONS IN NIGERIA - Banks -Insurance Companies -Discount Houses -Pension Funds Administrators -Fund Custodians -Stockbrokerage Houses -Mortgage Finance Companies Money & Capital Markets
  • INTERMEDIATION ROLES OF FINANCIAL INSTITUTIONS IN THE FINANCIAL MARKETS Money & Capital Markets Banks - Accept demand, savings and time deposits, and make loans directly to borrowers or through the financial markets . - Act as issuing houses for companies raising funds in the capital market . - Act as underwriters for new issues in the capital market
  • Insurance Companies Receive premium payments from insured parties. Premiums received are invested for capital preservation and growth.   Discount Houses Their main role is to make two-way market for Government securities. Act as underwriters for all government securities not sold in the market. Pension Funds Administrators Set up so that employees of various companies and governments agencies can make contributions and receive income after retirement. Accumulated Funds are usually invested via the financial markets.   Mortgage Finance Companies Similar to banks (take deposits and book loans) except they do not operate current accounts. They lend funds primarily to individuals and businesses for real estate mortgage loans. Funds are also invested in financial and real estates Markets. Money & Capital Markets
  • Stock Broking Firms They buy and sell securities on a recognized Exchange on behalf of their clients. Investment Trust Companies Their business is investing in the stocks and bonds of other companies and the government. Unit Trust Companies Pool funds from savers through sale of shares, and bonds issued by various businesses and governments. Create a diversified and professionally managed portfolio of securities to achieve a specified investment objective, such as capital preservation, liquidity with a high return.   Venture Capital Companies They specialize in raising funds for new business ventures.   Money & Capital Markets
  • Break! {10.30-11.00am}
    • Section 1: Background to Financial Markets & Environment
    • Part B
    • Participants in the Nigerian Financial Markets
    • Regulatory Agencies in the Nigerian Financial Markets
    • Banks’ Clearing and Settlement Systems in Nigeria
    • Features of Financial Assets & Liabilities
    Training Course Outline
  • Participants in the Nigerian Financial Markets
    • Regulators Central Bank of Nigeria (CBN) Nigeria Insurance Deposit Corporation (NDIC) Securities & Exchange Commission (SEC) National Pension Commission (PenCom) National Insurance Commission (NIC) Operators Banks Other non-bank financial institutions Capital Markets Operators Pension Operators Insurance Companies Investors
  • Financial Markets Regulatory Agencies
  • Financial Market Regulators
    • The Central Bank of Nigeria
      • Regulates Money Market Operators mostly banks
      • Determines the extent to which banks can give out loans
      • Formulates monetary policies in line with economic dynamics
      • Capital and money markets returns are arguably inversely related.
  • Nigeria Deposit Insurance Corporation (NDIC)
    • NDIC was set up to provide insurance cover for depositors in the event of bank’s liquidation.
        • It assesses the safety of assets and soundness of our banks
        • It monitors the sale of assets of liquidating banks
        • It protects the interest of depositors
  • Securities & Exchange Commission (SEC)
    • The Securities and Exchange Commission (“SEC”), the apex regulatory body of the Nigerian Capital Market derives its powers from the Investments and Securities (ISA) Act of 1999 (amended 2007). It is a government institution, which operates under the Ministry of Finance.
    • The SEC is statutorily charged with the following responsibilities:
    • Promoting and monitoring of investments in Nigeria
    • Liaison with appropriate government agencies on behalf of foreign investors
    • Advising government on the investment climate in Nigeria
    • Providing support services for potential investors
    • Negotiating incentive packages for investors
    • Issuance of guidelines regarding activities or business options open to foreign investors. 
  • The Securities and Exchange Commission
    • SEC governs the conduct of activities in the Nigerian capital market
        • SEC regularly appraises the competence of capital market operators
        • Formulates relevant policies regularly
        • Registers, regulates and monitors capital raising, etc.
    04/04/11
  • The Nigerian Stock Exchange (an SRO)
    • A Self Regulatory Organization
    • Established in 1960 as the Lagos Stock Exchange;
    • Became the Nigerian Stock Exchange in 1977;
    • Seven branches/trading floors have been established in different parts of the country – Lagos, Kaduna, Port Harcourt, Kano, Onitsha, Ibadan, Uyo, Benin, Abuja and Abeokuta.
    • The NSE is governed by a Council. The members of the Council are elected at the NSE’s Annual General Meeting
    • The functions of the Council include the following:
      • Granting of quotation and listing of securities;
      • Formulating rules and regulations for the stock market;
      • Enforcing discipline among members of the Exchange;
      • Dealing with complaints about and amongst brokers and the investors;
      • Protecting investors’ interest
    • It provides the platform for the trading of quoted shares/stocks
    • Monitors the quotation of stock via its Quotation Committee
    • Penalizes erring stock broking firms
    • Releases quarterly results of companies to the public
    • Liaises with SEC,CBN for the growth of the capital market.
    The Nigerian Stock Exchange
  • A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. Features of Financial Assets & Liabilities
    • A financial asset is any asset that is:
      • Cash;
      • an equity instrument of another entity;
      • a contractual right to:
        • 1. to receive cash or another financial asset from another entity
        • 2. to exchange financial assets or financial liabilities with another entity under conditions that are potentially favourable to the entities.
    Features of Financial Assets & Liabilities
    • Currency (cash) is a financial asset because it represents a medium of exchange
    • It is the basis on which all transactions are measured and recognized in financial statements
    • Cash deposit with a financial institution is a financial asset
    • It is the right of the depositor to obtain cash from the institution.
    Features of Financial Assets & Liabilities
    • Financial assets represent contractual right (obligation) to receive (deliver) cash in the future are:
    • Trade Accounts Receivable & Payable
    • Bills Receivable & Payable
    • Loans Receivable & Payable
    • Bonds receivable & Payable
    • Deposits & advances.
    Features of Financial Assets and Liabilities
    • Instead of Cash exchange, another type of financial instrument may be exchanged
    • A Promissory note gives the holder the contractual right to receive and the issuer the contractual obligation to deliver government bonds
    • Usually in the form of Bonds or Notes
    • The bonds represent obligations of the issuing party to pay cash.
    Features of Financial Assets and Liabilities
    • The term ‘financial instrument’ covers both financial assets and financial liabilities
    • includes both the most straightforward financial assets and liabilities such as trade receivables and trade payables and
    • the most complex ones such as derivatives and embedded derivatives.
    Features of Financial Assets and Liabilities
    • Financial Assets and Financial Liabilities
    • Financial instruments include primary instruments
      • Receivables
      • Payables
      • and equity instruments)
    • and derivative financial instruments
      • Financial options
      • Futures and Forwards
      • Interest rate swaps
      • Currency Swaps.
    Features of Financial Assets and Liabilities
  • Features of Financial Assets and Liabilities
    • Tenor greater than 10 years.
    • Coupon payments every six months
    Bonds
    • Tenor greater than One Year but less than 10 years
    • Have coupon payments every six months
    • Last payment includes coupon payment and principal
    Notes
    • Tenor less than 1 year to maturity
    • Do not have any coupon payments
    • The current price is below the amount due at T, so that these are called discount bonds
    • They are the most liquid bonds
    • Bills
    Description Type
  • Banks’ Clearing & Settlement Systems in Nigeria
    • Section 2: Understanding & Pricing Money Market Instruments
    • Part A
    • Introduction to Money Market Instruments
    • The Role of Money Market in Financial intermediation
    • Classifying Short-term and long-term funds in the market
      • Deposits & Loans
      • Bankers’ Acceptances & Commercial Papers
      • Treasury Bills
      • Repo (Repurchase)
      • Forward Rates Agreements & Swaps
    Training Course Outline
  • Introduction to Money Market Instruments
  • The Role of Money Market in Financial Intermediation
  • Short-term Debt Instruments [Demand Deposit]
  • Interest Rate Bearing & Discounted Instruments
    • Instruments can be either interest bearing or discounted Instrument
      • Interest bearing instruments include Time Deposits Interest Bearing Certificate of Deposits (CDs) and Commercial Papers
      • Discounted instrument include Bankers’ Acceptances (a trade finance instrument).
  • Certificate of Deposits (CDs)/ Call Deposits
    • Characteristics of Demand Deposits include:
        • Time and interest rate fixed
        • Interest accrued in arrears
        • Payment annualize and paid at maturity
        • Withholding tax charged
        • Termination before end date may attract penalty
    • Characteristics of Time Deposits include:
        • Fixed interest rate
        • Tenor open-ended
        • Interest accrued in arrears
        • Payment annualized and paid at maturity
        • Withholding tax charged
        • Customer can terminate without charge but may face notice
  • Short-term Debt Instruments [Call Deposit]
  • Short-term Debt Instruments [Savings Deposit]
  • Short-term Debt Instruments [Commercial Papers]
  • Commercial Papers (CPs)
    • CPs are promissory notes
    • Used by bluechip companies and banks to borrow short-term funds
    • They are usually discounted (i.e. interest is paid upfront)
    • unsecured and for periods not exceeding 180days.
    • Banks in CPs transactions are merely acting as agents
    • If the issuer does not have funds to repay on maturity, the bank is not obliged to the investor
    • Due to the relative risk of CPs to investors, the upfront interest is higher than for other instruments.
    • Commercial Paper issued by a corporation with maturity T < 1 year. They are also sold at a discount, so that the interest is paid through the appreciation in the price over the term of the bond.
    • Corporate bonds are riskier than government bonds because of the possibility of default by a corporation is larger. Default occurs when a company cannot make the payments promised to its creditors.
    • In this case the company declares bankruptcy and the bankruptcy court divides up the remaining assets of the company among the creditors following a credit priority order.
    Commercial Papers (CPs)
  • Short-term Debt Instruments [Bankers’ Acceptances]
  • Bankers’ Acceptances (BAs)
    • BAs are time drafts or bills of exchange which are drawn on a bank and have been accepted by the bank indicating an unconditional promise to honour such instruments at their maturity.
    • When a bank ‘accepts’ (signs) on a BA, it has an obligation to pay the bill at maturity to any bonafide ‘holder in due course’. Likewise, the issuer has an obligation to pay the bank.
    • Like CP, BA is a discounted instrument.
    • When a bank ‘accepts’ i.e. signs on a draft or Bill of Exchange it has an obligation to pay the bill at maturity to any bonafide ‘holder in due course’.
    • The issuer has an obligation to pay the bank. Like CP, BA is a discounted instrument.
  • Short-term Debt Instruments [Treasury Bills]
  • Treasury Bills: An Introduction
    • Overview of Treasury Bills
    • Discount Factor Quotation
    • Price Discount and Yield Quotation
    • Holding Period Return
  • Treasury Bills - Features
      • Short term, zero-coupon (nil interest), issued by the CBN on behalf of the FGN.
      • A Risk free instrument in that government will not default on its repayment obligation.
      • Issued to finance Government short-term deficit.
      • Features of Treasury Bills
      • Bearer Security or in book entry form
      • DMO (Debt Management Office) acts as manager and custodian
      • Treasury Bills are sold through Banks, Discount Houses and Selected Brokerage Firms
      • These Agents maintain T-Bill Account with the Central Bank for the purpose of T-Bill transaction
      • Transactions are done on Auction Basis and in multiple of N,1000 with Minimum investment of N10,000.
  • Treasury Bills – Overview Contd’ Page
      • Tenor : 91 days, 182 days and 364 days
      • Tenor Bidding Settlement Frequency
      • 90/91 Thursday Thursday Weekly
      • 182 Wednesday Wednesday Weekly
      • 364 Friday Friday Monthly
      • Bid must be submitted not later than 11:00am on day of auction and
      • also submitted in price quotation . On maturity of the bill, Face value
      • will be credited to the CBN Operating account of the PDMM with the
      • maturing bills in its book entry account
  • Treasury Bills – Overview Contd’ Page
      • Yield Price
      • 5% 98.77
      • 6% 98.52
      • 7% 98.27
      • 8% 98.03 Marginal Rate
      • 9% 97.78
      • 10% 97.53
      • Result: Yield 5% to 8% are successful bid while Yield 9% and 10% are
      • Failed bids
  • Treasury Bills – Overview Contd’ Page
      • Hands - on
      • Oyinnade invested N3million at the just concluded 90 day T bills
      • Auction, quoting a yield of 5%. If the auction closed at a yield of 6%
      • a.) What will she part with on bid day
      • b.) What will be paid to her on maturity date
      • If she had quoted a yield of 7%
      • c.) What will she part with on bid day
      • d.) What will be paid to her on maturity date
  • Treasury Bills – Overview Contd’ Page
      • Answer
      • Oyinnade invested N3million at the just concluded 90 day T bills
      • Auction, quoting a yield of 5%. If the auction closed at a yield of 6%
      • a.) N3million – (N3million x 6% x 90/365) = N2,955,616.44
      • b.) N3million
      • c.) Nil
      • d.) Nil
  • Discount Factor/Price/DV/ Yield Quotation
    • Discount Factor
    • Discount Rate: 7%
    • Outstanding days to maturity (t): 90
    • No of days in the year (n): 365
    • Discount factor = 1- (d x t)
    • n
    • Discount factor = 1- (7% x 90) = 0.9827
    • 365
    Page
  • Discount Factor/Price/DV/ Yield Quotation Contd’
    • Price
    • Price = df x 100
    • = 0.9827 x 100
    • = 98.27
    • Please note that if par value of Treasury bill is N1,000, price is
    • 98.27% and not N97.78
    Page
  • Discount Factor/Price/DV/ Yield Quotation Contd’
    • Discount Value
    • Where Discount factor = 0.9827 and Face value = N100,000,000.00
    • Discount Value (DV) = 0.9827 x 100,000,000.00
    • = N98,270,000.00
    • Inherent Discount = (N100,000,000 – N98,270,000)
    • = N1,730,000.00
    Page
  • Discount Factor/Price/DV/ Yield Quotation Contd’
    • Yield
    • Annualized Yield = Discount x N
    • Discount Value T
    • Discount = N1,730,000.00
    • Discounted Value = N98,270,000.00
    • T = Holding Period = 90 days
    • N = Days in a year= 365 days
    • Annualized Yield = 1,730,000 x 365 = 7.14%
    • 98,270,000 90
    Page
  • Holding Period Yield
    • Holding Period Yield
    • Holding Period Yield = Sales Price – Buying Price x N
    • Buying Price T
    • SP (98.27), BP (96.88)
    • HPY = 98.27 – 96.88 x 365 = 16.89%
    • 96.88 31
    • Scenario
    • Oyinnade purchased 91 day bills @ 12.65% and sold when it was 60 days to maturity @ 7.1%
    Page
  • Medium-Long Term Fixed Income [Treasury Notes]
  • Medium-Long Term Fixed Income [Treasury Bonds]
  • Repurchase Agreement [Repo]
  • Forward Rate Agreement & Swaps
  • Lunch! {2.00-3.00pm}
    • Section 2: Understanding & Pricing Money Market Instruments
    • Part B
    • Matching of Funds in the Money Market
    • Managing mis-matched Funds in the Money Market
    • Dynamics of Deposit and Loans in the Money Market
    • Understanding Synthetic Deposits and Loans
    • Treatment of Dates in Financial Computation (Day Count & Annual Basis Conventions)
    Training Course Outline
  • [Day 2]
    • Section 3: Understanding & Pricing Capital Market Instruments
    • Part A
    • Understanding the Stock Markets and Indicators (Market Index, Sector Index, EPS, DPS, PER & Yields)
    • Understanding NSE Daily Official List
    • Part B
    • Automated Trading System (ATS) in the Nigerian Stock Market
    • Stock Trading Simulation
    Training Course Outline
  • Introduction
    • Common Stocks or Ordinary Shares
      • Represents an ownership interest in a business entity
      • Ownership interest also refers to as Residual Interest
      • Subordinates to all other claims
  • Introduction
    • Stockholders/Shareholders Interest
      • Companies are legal entities
      • Stockholders have limited liability
      • Stockholders are the owners of companies
      • Ownership is therefore represented by the proportion of interest in a company.
  • Introduction
    • Stockholders/Shareholders Interest
      • The interest in a company as recognized in the form of stocks/shares .
      • Each stock/share in a company has nominal (par value)
      • Typically, a company stock (share) must not sell below par.
  • Introduction
    • Stockholders/Shareholders Interests
      • Stockholders have ultimate control over the company’s affairs (in theory)
      • In practice, interest is usually in the voting power
      • Voting can be in person or by proxy
      • Interests (shares) are normally issued as a class of shares
      • In some jurisdictions, companies can also issue two classes of shares (Class A and Class B). This is not the case in Nigeria.
      • The different classes will have different voting and/or dividend rights.
  • Introduction
    • Stockholding/Shareholding
      • The total number of shares issued and number of shares outstanding (fully paid) must be the same in Nigeria.
      • In other jurisdictions where companies can buy back their shares, this is NOT the case. In which case shares issued may be greater than shares Outstanding.
      • The number of shares outstanding is a measure of free float or liquidity.
      • The market value of the share outstanding is referred to as the company’s Market Capitalization.
  • Introduction
    • Corporate Actions
      • Shareholders in a company, as owners, are entitled to receive dividend usually in the form of cash.
      • Dividend payment may be quarterly, semi-annually or annually.
      • This is usually paid from the current earnings of the company.
      • Companies may also declare stock dividend in the form of Bonus .
      • In the case of stock dividend (bonus), the company will simply increase the number of shares outstanding (issued and fully paid).
  • Introduction
    • Corporate Actions
      • The Board of Directors determine how much to be paid as dividend (having considered all pending covenants).
      • Shareholders can reduce but not increase the recommended amount of dividend.
      • A record date is usually associated with most corporate actions regarding dividend payment.
      • The record date is the basis of qualification or entitlement to the announced dividend (cash or stock).
  • Introduction
    • Questions
      • Why is stock dividend (bonus) announcement usually associated with significant price increase?
      • Why is stock price adjusted for cash and stock dividend?
      • How is this done?
  • Introduction
    • Questions
      • When will stock be trading cum dividend ?
      • When will it go ex dividend ?
      • How is this done?
  • Introduction
    • Share price adjustment for Cash dividend
      • Examples
    • Share price adjustment for stock dividend (Bonus)
      • Examples
  • Introduction
    • What About Stock Split?
      • For a relatively high stock price, a company can decide to make it more tradable for enhanced liquidity
      • A 3-for-1 split means that 1 ordinary share will be replaced with 3 new ordinary shares hence increasing the outstanding shares of the company
      • The share price will be adjusted down to one-third of the price.
      • The par value of the company is not affected.
  • Introduction
    • What About Stock Consolidation ?
      • For a relatively high outstanding shares , a company can decide to reduce the number of shares outstanding
      • A 3-for-1 consolidation means that 3 ordinary shares will be replaced by 1 new ordinary shares hence reducing the outstanding shares of the company
      • The share price will be adjusted up by triple of the price.
      • The par (nominal) value of the company is not affected.
  • Introduction – Measuring Market Performance
    • Index & Computation
      • Index expresses the ratio between the level of a given variable at a point relative to another level at a previous point.
      • The previous point serves as the base point (value) of the Index.
      • The base Value serves as the starting value of the Index. Typical Index values are 1; 100 and 1000
      • The Index of a variable =
      • [Current Variable Value/Base Variable Value] * Base Value
      • The Index is therefore a measure of performance (growth) in a variable.
  • Introduction – Measuring Market Performance
    • Stock Market Performance
      • Price performance and direction can serve to measure how stocks in the market are performing, on average.
      • Index computation provides a means of measuring the average stock prices from one point to the other.
      • The measurement can be on the basis of all stocks in the market or some selected stocks in the market.
      • In the case of selected stocks, there could be criteria (rules) for the selection
  • Introduction – Measuring Market Performance
    • Stock Market Performance
      • Price performance and direction can serve to measure how stocks in the market are performing, on average.
      • Index computation provides a means of measuring the average stock prices from one point to the other.
      • The measurement can be on the basis of all stocks in the market or some selected stocks in the market.
      • In the case of selected stocks, there could be criteria (rules) for the selection
      • Selected stocks are included on the basis of their relative importance.
  • Introduction – Measuring Market Performance
    • Stock Market Performance
        • The Relative Importance of each stock can be captured on two ways:
        • Price-weighted basis
        • Value-weighted basis
      • Price-weighted basis :
        • The price of each stock serves as a measure of the importance of that stock in the Index. A high-priced stock has more influence than a low-priced stock.
      • Value-weighted basis :
        • This approach uses the market capitalization of the stocks as a measure of its contribution to the total market capitalization of the market.
        • Stocks with high market capitalization has higher influence of the Market Index.
        • Market Capitalization = (stock price) * (Issued/Outstanding shares)
  • Introduction – Measuring Market Performance
    • Index Calculation
        • Price-weighted Index :
        • Index (I) =
        • = price of stock 1 at period t;
        • = price of stock 2 at period t
        • = price of stock 3 at period t and = Index Divisor.
  • Introduction – Measuring Market Performance
    • Index Calculation
      • Value-weighted Index :
        • Index (I) =
        • = price of stock 1 at period t; = stock 1 outstanding shares
        • = price of stock 2 at period t = stock 2 outstanding shares
        • = price of stock 3 at period t = stock 3 outstanding shares
        • and = Index Divisor.
  • Introduction – Measuring Market Performance
    • Index Calculation – Price-weighted and Value-weighted Examples
    100   117.8   113.3   100   Price-weighted 100   114.3   109.1   100   Value-weighted   40   44   41   40 Stock 3   20   25   26   20 Stock 2   30   37   35   30 Stock 1                   Index Price Index Price Index Price Index Price   t=3 t=2 t=1 t=0  
  • Introduction – Measuring Market Performance
    • The Index Divisor changes over time.
    • The Index divisor is used to ensure continuity
    • Whenever there are changes in the outstanding shares or a removal and inclusion of new stocks in the computation, the divisor must be adjusted
    • This is the only tricky part of index computation!
  • Attributes of Some Popular Stock Market Indices
    • Price-weighted indices
      • Dow Jones Industrial Average (DJIA)
      • Nikkei 225
    • Value-weighted indices
      • S&P 500
      • FTSE 100
      • CAC 40
      • DAX ( Total Return Index in that dividend is included in the index computation)
      • HANG SENG
      • EUROSTOXX 50
      • EUROTOP 100
    • Except DAX, all other indices are price indices – dividend excluded from the computation.
  • Attributes of Some Popular Stock Market Indices Not Included value-weighted 33 stocks trading on Hong Kong Stock Exchange Hang Seng Not Included price-weighted 225 stocks trading on Tokyo Stock Exchange NIKKEI 225 Not Included value-weighted 40 stocks trading on Premier Marche CAC 40 Included value-weighted 30 stocks trading on Frankfurt Stock Exchange DAX Not Included value-weighted 100 stocks trading on LSE FTSE 100 Not Included value-weighted 100 stocks trading on major markets of Europe Eurotop 50 Not Included price-weighted 30 stocks trading on NYSE & NASDAQ DJIA Not Included value-weighted 500 stocks trading on NYSE, AMEX & NASDAQ S&P 500 Dividend Weighting Components  
  • Attributes of The NSE All-Share Index
    • A Value-weighted index
    • A Price Index (excludes paid dividend)
    • The NSE All-Share Index is made up of all equities quoted on the NSE Exchange.
    • The base date for the All-share index is January 3, 1984 with a given value of 100.
    • Understanding
    • The Nigerian Stock Exchange Daily Official List
    • ( SEDOL ) Report
    • Detailed Analysis of SEDOL
  • Break! {10.30-11.00am}
    • Part B
    • Automated Trading System (ATS) in the Nigerian Stock Exchange (NSE)
    • Stock Trading Simulation on The NSE
    Section 3: Understanding & Pricing Capital Market Instruments
  • The NSE & CSCS Trading Dynamics
    •  
    • The Nigerian Stock Exchange 
    • Provides the a venue for trading on capital market securities through licensed stockbrokers
    • Checks and validates deals done on daily basis. ( Market Oversight – by SEC, NSE & CSCS )
    • Transmits to CSCS on on-line real time basis through Automated Trading System (ATS) on transactions that occur on the floor of The Exchange.
    • At CSCS:
    • Transactions obtained from transactions on The Exchange are processed Trades Settlement:
    • Stockbrokers daily financial exposure to each other are communicated to the stockbrokers' settlement banks via diskettes supported by hard copies.
    Flow of Trades – the CSCS
    •  
    • Stockbrokers' (Settlement) Banks
    • Stockbrokers' banks can only allow Trading Accounts to be operated on the basis of written instructions by either the:
    •   Dealing Member who maintains the Trading Account or those contained in CSCS schedule.
    • Stockbrokers' banks can only permit Trading Accounts to be used for purposes of effecting settlement of CSCS transactions
    • The primary mode of settlement of CSCS transactions by settlement banks is by means of Inter-Bank Settlement System (NIBSS) – inter-brokers cash settlement.
    Flow of Trades (cont.)
    •  
    • Registrar Information :
    • Dematerialized certificates are re-cycled to the relevant registrars within 48 hours for scrutiny and retention.
    • CSCS sends data information of the changes that have taken place through buying and selling of shares to the registrars in diskettes and hard copies.
    • The registrars update registers with the stock movement details sent to the registrars in diskettes.
    • The registrars pay dividend warrants to shareholders whose names appear on the register on a day to the closure date .
    Flow of Trades (cont.)
    • Transaction Flow
    • Transactions are now settled three days after the deal/trade date (T).
    • The diagram below shows the transaction flow in the T+3 trading cycle.
    Transaction Day (T0) Day 1 Day 2 Day 3 Stock in pending state (in buyer’s and seller’s account). *’Not’ available for resale and not settled in buyer’s account: cannot be sold by the buyer. Stock settled in buyer’s account( seller’s account credited for stock and buyer’s account cash debited with Settlement banks) Trade took place (sold if stock is available in client’s account) Flow of Trades – the CSCS
    •  
    Transaction Cycle [T+3 ] Delivery Versus Payment (DVP) Day T.       Transactions occur on the floors of The Exchange without pre-funding of Trading Accounts by stockbrokers. Investors are informed. Day T +1      Stockbroking firms inform clients of purchases/shares made for them Day T+2       On or before 12 noon of Day T+2, Settlement Bank alert CSCS about the possibility of any broker’s inability to meet his financial obligation on Day T+3.   Day T+3       Account must be funded on/or before 9.00 a.m. (before clearing). for Day T transaction. Note – T- Transaction Day. Flow of Trades – the CSCS
  • INVESTORS IN CSCS & TRANSACTION FLOW VIA CERTIFICATES VIA THE SECONDARY MARKET WSP Deposit certificates with NSE licensed Stockbrokers Broker forwards relevant information (electronically) to CSCS CSCS issue CHN and Investor account to investors Stockbroker sends Certificate Deposit Form, original certificate to company registrar for verification Complete relevant KYC forms & Transfer forms: as transferor If signature okay, registrar sends verified item to CSCS for lodgment If signature or documentation error, registrar sends unverified item to stockbroker for reprocessing Complete relevant KYC forms, CSCS Shareholder Particulars Form (R005) & Transfer forms: as transferee Broker forwards relevant information (electronically) to CSCS CSCS issues CHN* and Investor account to investors *One CSCS CHN serves for multiple accounts with stockbrokers Stockbroker executes BUY mandate using Investor account number into CSCS Depository Stock settles on T+3 Days into CSCS Stockbroker forwards completed Transfer Form( Transferee) to Registrar CSCS Client info Broker info Securities info Broker “A”
  • NSE-CSCS Trading Connectivity Identity Verification Broker “A” CSCS Processor Server Brokers Record Clients Record NSE Trading Engine Broker “B” Broker “C” Broker “D” Broker “E” Brokers Record Clients Record Clients Record Securities Record Securities Record
    • Transaction Flow
    • Transactions are now settled three days after the deal/trade date (T). The diagram below shows the transaction flow in the T+3 trading cycle.
    Transaction Day (T0) Day 1 Day 2 Day 3 Stock in pending state (in buyer’s and seller’s account). *’Not’ available for resale and not settled in buyer’s account: cannot be sold by the buyer. Stock settled in buyer’s account( seller’s account credited for stock and buyer’s account cash debited with Settlement banks) Trade took place (sold if stock is available in client’s account) Flow of Trades – the CSCS
  • Netting of CSCS Trades Mechanism Dr /Cr Dr /Cr Dr /Cr Dr /Cr Dr /Cr Dr /Cr Dr /Cr Dr /Cr Dr /Cr Dr /Cr Dr /Cr Broker “H” NIBSS Settlement Bank “Z” Broker “F” Broker “D” Broker “B” Broker “A” Settlement Bank “Y” Settlement Bank “X” Broker “C” Broker “G” Broker “E”
  • The NSE Automated Trading System
  • Following the Market Trading
  • Placing Sell Instruction while Trading
  • Placing Buy Instruction while Trading
  • Placing Buy & Sell Instruction while Trading
  • Open Positions of a Trader
  • Discovering Market by Order Size
  • Discovering Market by Stock Price
  • Stock Prices & Other Details
  • Observing Gainers & Losers
  • Observing Stocks Trading in Continuous Trading State
  • Lunch! {2.00-3.00pm}
    • Section 4: Back Office Operations in the Nigerian Stock Market
    • Roles of Operators & Administrative Functions
    • Share Verification and Registration Procedures
    • Trading and Operational Processes in the Stock Market
    • Documentation of Transactions in Stockbrokerage environment
    • Clearing and Settlement of Funds and Instruments
    Training Course Outline
  • Share Verification and Registration
    • CATEGORIES OF VERIFICATION PROCEDURES
      • Verification of Signature on Transfer Forms
        • Confirm Signature from Application/Transfer Binder
      • Verification of Signature on documents
        • Use Account Number to retrieve the physical Binder or lookup the Scanned Electronic Record.
        • Compare Signature in Binder/System with Signature on Document
      • Verification of Signatures relating to Banks, Stockbrokers & authorized signatories
        • Check Updated Records of Banks’ Authorized Signatory Book
        • Scanned Records of Stockbrokers’ Signature Records
        • Scanned Records of Stockbrokers Accredited Representatives.
    Verification Procedures
    • All requests for securities purchase/mandate are properly logged by relationship/account managers
    • Execution of purchase mandate are made when the deposit account has been sufficiently funded to meet order request
    • When an order requesting client has less credit balance than the amount needed to meet his/her order, the account manager communicates the credit position to the accountholder for actions to be taken on the part of the client
    • In situation where a client could not be reached, the relationship manager contacts the Trader and both shall mutually agree on the units to buy that could be accommodated by the client credit balance.
    Pre-execution Funding Policy
    • What is Jobbing?
    • Jobbing Procedures
    • Interfacing Functions
    • Jobbing Controls
    • Challenges
    BackOffice Transaction Processing
  • Documentation of Transactions
    • Core Responsibilities of the BackOffice:
      • Making sure that the Company’s statements of Accounts are up to date
      • Ensuring that the Company’s account is in line with the GAAP and in conformity to the accounting procedures put in place by the management.
      • Ensuring that all statutory reports are generated and forwarded in line with the requirements of relevant regulatory and compliance bodies.
    BackOffice Processes & Reporting
    • Making sure that returns are accurately computed and timely payments made as required;
    • Ensuring that all source documents relating to all transactions are available and appropriately filed for ease of retrievals and reporting;
    • Reporting key financial figures to the management on agreed basis and highlight issues resulting thereof.
    BackOffice Processes & Reporting
    • Monitoring budgeted and actual figures and reporting variance levels to the managing director regularly and to other stakeholders as the needs arise;
    • Generating financials reports promptly for use by stakeholders;
    • Making sure that clients’ accounts reflect all payments and withdrawals from accounts at all time.
    • Ensuring that payments from other locations by clients are followed-up and captured to reflect clients account status.
    BackOffice Processes & Reporting
    • Ensuring that clients have sufficient funds in stockbrokerage accounts to cover order requests and cash withdrawals;
    • Ensuring that stockbrokerage trading account is sufficiently funded and balance communicated to traders on a daily basis;
    • Managing cash balances in the Company’s call and current accounts to ensure optimal cash management.
    • Ensuring that all accounts are reconciled on a regular basis and issues arising there from promptly communicated.
    BackOffice Processes & Reporting
    • Brokers report details of executed transaction to the COO, Relationship Manager and the Financial Controller of the company upon return from the NSE floor
    • Thereafter, it shall be the responsibility of each relationship manager to ensure that such transactions are captured and posted
    • Documents relating to order placement, execution and confirmation of purchase/sale are appropriately documented in both soft and hard copy in the client’s file.
    Broker Transaction Reporting
    • Trade/Order execution are communicated to affected clients via Contract Notes
    • At the end of each trading day, broker reports executed and unexecuted transactions to COO and Financial Controller
    • Market events, news, opportunities and unusual transactions report to the COO and Head of Research any.
    Broker Transaction Reporting
    • Executed order contracts notes are prepared and forwarded to clients within 48 hours
    • Where unexecuted order exist in the jobbing book, client must be notified at the close of the market for possible change in request or modification of order;
    • In cases of failed trade due to system failure or malfunction, CSCS is informed as soon as the failure is brought to the Trader’s attention;
    • In the event of error trades into client’s account with the CSCS, an acknowledged copy of the letter to CSCS informing CSCS is attached with the letter notifying the client of such errors and stating efforts being made to correct the situation;
    Broker Transaction Reporting
    • On correction or re-execution of the transaction, the client will be communicated to within 24 hours of execution
    • Securities are forwarded to the registrars for verification and/or lodgment
    • All certificates submitted for verification and dematerialization are photocopied and the client made to sign all copies with an attached note specifying the number of certificates collected with date of collection
    • You can verified without dematerializing.
    Broker Transaction Reporting
  • Operational Failures – BackOffice Challenges
    • EXTERNAL
    • Natural disaster / catastrophic events / terrorist attacks
    • Unresponsive to legal / regulatory changes
    • Product Misuse (Guaranteed Products)
    • PEOPLE
    • Employee fraud / malice
    • Unauthorized Activity / Rogue Trader
    • Loss or lack of key personnel
    • Inadequate workplace safety
    • SYSTEMS
    • Unavailability & instability of systems
    • Inappropriate infrastructure
    • Inadequate data security and access
    • Inappropriate data usage
    • PROCESS
    • Payment / Settlement / Delivery failure
    • Documentation / Contract Risk
    • Internal / External reporting failure
    ROOT CAUSE IMPACT
    • FINANCIAL
    • Direct losses
    • Indirect losses
    • Excessive re-work
    • Manual work-around
    • Loss of or damage to assets
    • Reduced employee productivity
    • BRAND
    • Customer dissatisfaction
    • Negative media publicity
    • Damaged employee morale
    • LEGAL / REGULATORY
    • Sanctions
    • Lawsuits / class action
    • Fines
    • Loss of license
  • Flow of Trades – the CSCS
    •  
    • The particulars in the CSCS Account Record forwarded by the Stockbroker forms the database for opening client’s account and subsequent transaction update to the registrars.
    • System generated account number is taken by the CSCS system but the book-entry will in addition reflect the account details on the lodged certificates ;
    • CSCS issues Approved Certificate Deposit Forms, which certifies stockbrokers to trade. That the shares are now in the CSCS system.
    • In effect, all shares to be traded on the floors of the NSE must have their certificates verified by the relevant registrars and recorded in electronic book-entry in the Depository of CSCS for the account of the Selling Dealing Member prior to being eligible to be traded.
    •  
    • The Nigerian Stock Exchange 
    • Provides the avenue for trading on capital market securities through licensed stockbrokers
    • Checks and validates deals done on daily basis. ( Market Oversight – by SEC, NSE & CSCS )
    • Transmits to CSCS on on-line real time basis through Automated Trading System (ATS) on transactions that occurred on the floor of The Exchange.
    • At CSCS:
    • Transactions obtained from transactions on The Exchange are processed Trades Settlement:
    • Stockbrokers daily financial exposure to each other are communicated to the stockbrokers' settlement banks via diskettes supported by hard copies.
    Flow of Trades – the CSCS
    •  
    • Stockbrokers' (Settlement) Banks
    • Stockbrokers' banks can only allow Trading Accounts to be operated on the basis of written instructions by either the:
    •   Dealing Member who maintains the Trading Account or those contained in CSCS schedule.
    • Stockbrokers' banks can only permit Trading Accounts to be used for purposes of effecting settlement of CSCS transactions
    • The primary mode of settlement of CSCS transactions by settlement banks is by means of Inter-Bank Settlement System (NIBSS) – inter-brokers cash settlement.
    Flow of Trades (cont.)
    •  
    • Registrar Information :
    • Dematerialised certificates are re-cycled to the relevant registrars within 48 hours for scrutiny and retention.
    • CSCS sends data information of the changes that have taken place through buying and selling of shares to the registrars in diskettes and hard copies.
    • The registrars update registers with the stock movement details sent to the registrars in diskettes.
    • The registrars pay dividend warrants to shareholders whose names appear on the register on a day to the closure date .
    Flow of Trades (cont.)
    • Transaction Flow
    • Transactions are now settled three days after the deal/trade date (T). The diagram below shows the transaction flow in the T+3 trading cycle.
    Transaction Day (T0) Day 1 Day 2 Day 3 Stock in pending state (in buyer’s and seller’s account). *’Not’ available for resale and not settled in buyer’s account: cannot be sold by the buyer. Stock settled in buyer’s account( seller’s account credited for stock and buyer’s account cash debited with Settlement banks) Trade took place (sold if stock is available in client’s account) Flow of Trades – the CSCS
    •  
    Transaction Cycle [T+3 ] Delivery Versus Payment (DVP) Day T.       Transactions occur on the floors of The Exchange without pre-funding of Trading Accounts by stockbrokers. Investors are informed. Day T +1      Stockbroking firms inform clients of purchases/shares made for them Day T+2       On or before 12 noon of Day T+2, Settlement Bank alert CSCS about the possibility of any broker’s inability to meet his financial obligation on Day T+3.   Day T+3       Account must be funded on/or before 9.00 a.m (before clearing). for Day T transaction. Note – T- Transaction Day. Flow of Trades – the CSCS
    • Public Offers & Rights Processing
    • Key Steps
    • Collation of Application Forms.
    • Reconciliation of Payment Account (s).
    • Tracing of Payments and Matching of Funds with Application Forms.
    • Making of Returns to Registrars
    • Rights Trading Procedures
    • Rights of Already listed/quoted companies
    • Only Dealing Members of the NSE are permitted to trade in rights
    • Trading in line with the Listing requirements of the NSE
    • Rights Trading must be communicated on all documents relating to the rights publication
    • Stockbrokers verify rights seller signature on transfer form & Application Form
    • A Special Market (presently non-electronic) or Callover System is created by The Exchange for rights trading while the rights is open.
    • Buyers and Sellers trade rights through brokers on the NSE floor
    • NSE note Transfer Forms of Buyer & Seller after trading and exchange of bargain slips
    • Trading in rights don’t flow through the CSCS system
    • Rights Trading Procedures
    Arithmetic of Rights Trading-Case 1 (the case of 1 new share for every existing 5 ordinary shares) At a market price of N25.48 per share while new rights issue costs N20.00, to avoid holding dilution, the combined share will cost N24.57 ((1*20.00 + 5*25.48)/6) per share. Hence the rights share is worth N4.57 (N24.57-N20.00) to qualified shareholders.
    • Rights Trading Procedures
    Arithmetic of Rights Trading-Case 2 (the case of 4 new shares for every existing 1 Ordinary shares) At a market price of N6.50 per share while new rights issue costs N3.50, to avoid holding dilution, the combined share will cost N4.10 ((4*3.50 + 1*6.50)/5) per share. Hence the share is worth N0.60 (N4.10-N3.50) to qualified shareholders.
  • Capital Appreciation
    • This occurs when shares are sold at prices above the purchase prices.
    • Positive economic development can engender this. e.g. favourable business environment
    • It is a sign of economic boom
    • The closure date which is the day when a company’s register is closed tends to impact positively on capital appreciation.
  • How to Claim Your Dividend
    • Right to claim dividend becomes imperative immediately dividend is announced.
    • Investors can either wait till the dividend warrants get to their residences or instruct their broking firms to get them from the registrars on their behalf.
  • Revalidation of Stalled Dividend Warrants
    • After the expiration of the usual first six months, dividend warrants can be revalidated either personally or through your stock broking firms.
    • Personally, all you need do is to visit the registrar to the company with the warrants for renewal.
    • Alternatively, instruct your investment banker or stock broking house to revalidate the dividend warrant.
    • Most companies , in addition to the annual reports and accounts, publish the list of unclaimed dividend warrants.
    • Investors are enjoined to always go through this list to effectively monitor their investments.
  • Problems with Stock Investment
    • Non-execution of trade on the date specified on the mandate
    • Non-appearance of the stock (s) already in the client’s CSCS account
    • Non-arrival of dividend warrants, bonus certificates, AGM/EGM notice.
    •  
    • Registrars In Matters Relating To CSCS
    • In matters relating to stock market securities trading, the registrars are to deal only with the stock broking firms acting on behalf of investors/shareholders.
    • Verifies/authenticates investors claims (i.e. certificates and transfer forms) as presented through the stockbroking firm .
    • Sends verified certificate(s) and the signed Transfer Form(s) with two (2) copies of certificate deposit form(s) to the depository of CSCS within 48 hours.
    Share Registration & Verification
  • Causes of the Problems identified
    • Non-execution of trade
      • Stocks may not be available
      • Price indicated on the mandate may be outside the range of the prevailing market price
      • To maximize investors’ wealth in case of likely future fall in price
      • Industry development that could affect price direction.
    • Non-appearance of stock in CSCS account
    • Stocks normally appear on the fourth day trade is executed.
    • It could be a technical problem from CSCS
    • Notification should be sent to CSCS with the necessary document.
  • Nigerian Stock Market – Current Growth Drivers
    • Sectoral Drive
    • Pricing Correlation
    • New inflow of funds
      • PFAs Participation
      • Reduced Leveraged Costs
      • Foreign Indirect Portfolio Investments
    • Recent Liquidity Improvement
    • Information-induced Pricing
    • Increased Volatility(profit taking, loss cutting)
  • Some Important Dates in the Market
    • Declaration Date
    • The Declaration Date is the date on which a firm's board of directors issues a statement declaring a dividend. 
    • Holder-Of-Record Date 
    • This is the date on which the company opens the ownership books to determine who will receive the benefit(s). Note that adjustment is made on the closure date . Shareholders who bought on the closure date at the closure price are not entitled to benefit(s).  
    • Ex-Dividend /Ex-Script Date
    • This is the date on which the right to the next dividend no longer accompanies a stock.   
  • Placing Orders and Executing Trades
    • Types of order
    • The traditional methods of orders prevalent in most exchanges are present on the NSE i.e. market orders, limit orders, time orders and stop orders.
    • Most orders are executed on the Exchange as market orders.
    • Trading suspensions
    • Developments within a quoted company in which brokers might require more information from the company prior to making investment decisions.
    • When there is an investigation into the affairs of a quoted company.
    • Technical suspension
    • During a public offering of the shares of the company, the quoted company will be on technical suspension from when application for the public offering is filed with the NSE to the listing date of the offer.
  • Share Registration and Management
    • Register Closure
    • The company register is closed once a year for the purposes of payment of dividends and the issuance of share certificates (script).
    • The register is closed on the date announced by the company .
    • Sale of Shareholding
    • A shareholder can sell his holdings as soon as they are purchased, as long as he waives his right to hold a certificate, on the certificate waiver/option form R005.
    • When an investor opts for a certificate, he forfeits his rights to sell, until a certificate has been issued, verified and deposited at the CSCS depository.
    • CSCS Statement of Shareholding
    • A shareholder can obtain a statement as often he requires - for a fee from the CSCS or through his stockbroker.
  • Pre-CSCS Challenges
    • Securities Delivery And Settlement Process Prior to CSCS
    • In most cases, it took between 3 months - 12 months to receive Share Certificates 
    • Cancellation and frequent issuance and re-issuance of Certificates when sales occur (increased cost!)
    • Constant signature verification
    • Capital Gains advantage not exploited
    • Some Dealing Members sold what they did not have (“ Short Selling ”)
    • Numerous complaints on failed transactions
    • Loss of Certificates
    • Risk was high - undue delay, manually operated, manipulations due to long transaction cycle, minimal transparency, therefore general lack of trust in the system.
    • The Central Securities Clearing System (CSCS) - clearing and custodian agency
    • Launched on the 14 th of April 1997
    • before then, Delivery/Settlement was done on a rolling, manual T + 7 basis
    • Introduction of the CSCS reduced Delivery/Settlement period to T + 5
    • T+3 system was introduced in April year 2000
    • T+1 to commence on full implementation of remote trading.
    • Objectives of setting up CSCS
    • To minimize the bottlenecks associated with the transfer of shares
    • To reduce the production cost of issuing new certificates for traded securities
    • To eliminate the manual processing of transactions done on the floor of The Exchange .
    Clearing & Settlement of Securities
  • Clearing & Settlement of Securities
    • Functions:
    • Central depository for share certificates of companies quoted on The Nigerian Stock Exchange. 
    • Sub-registry for all quoted securities (in conjunction with registrars of quoted companies)
    • Issuer of central securities identification numbers to stockbrokers and investors.
    • Clearing and settlement of transactions.
    • Safe Keeping/Custodian (in conjunction with custodian member(s) for local and foreign instruments)
    • Other functions.
    • The objectives and functions of the CSCS
    • The CSCS provides;
    • An integrated central depository, clearing (electronic/book-entry transfer of shares from seller to buyer) and settlement (payment for bought securities) for all stock market transactions (DVP enabler).
    • A sub-registry where all securities listed on the NSE.
    • The CSCS is responsible for updating company register of members and issuing statement of holdings . The new T+ 3 system is now fully implemented.
    • CSCS Settlement Banks (Stockbrokers’ Banks)
    • All stock broking firms are required to open one trading account , to facilitate settlement of trades, in any one of selected banks.
    Clearing & Settlement of Securities
  • Front & Back Office Management Processes
    • Interfacing with Registrars & CSCS in Transactions
    • Key Steps
    • If Share Certificates are verified okay by the registrar,
      • The verified items are forwarded directly to CSCS by the Registrar
      • Items are posted into investor’s account under the stock broking firm for trading
    • Transfer forms of Buyers are forwarded to the CSCS by stockbroker for delivery to the Registrar
    • Transaction data are regularly forwarded to the Registrar by the CSCS
    • Registrar uses the data from the CSCS to update register of members record.
  • Front Office Management Processes
    • Front office Interfacing Documents
        • Mandate Instructions from Shareholders & Stockbrokers
        • Letter of Authority to Act
        • Bankers Confirmation from Shareholders
        • Request for consolidation and/or merger of accounts
        • Power of Attorney
        • Indemnity Letter from Stockbrokers
        • Transfer Forms
        • Letters relating to Change of Address/name or complaints and notification.
    The First task is the verification of the signature on all documents!
    • Case of Staled Dividend Warrant (An issued warrant becomes staled is it remained un-presented six months after the issue date).
    • System confirmation to ensure that it remains unpaid;
    • Cancellation of payment date printed on the warrant;
    • The date of cancellation is now written on the warrant;
    • The warrant is now signed (by authorized signatory) and stamped;
    • The warrant now remains valid for a period of another six months .
    Unclaimed Dividend Warrants Revalidation
    • Conditions warranting Reissuing duplicate Certificate.
      • Case of stolen, lost or missing of original certificate
      • Case of mutilated /defaced or unreadable certificate
      • Awareness of Cloned Certificate (s) in circulation.
    Re-issuance of Duplicate Certificate to a Shareholder
    • Procedure for Issuance of Duplicate Certificates
    • Letter of notification from the shareholder;
    • Confirmation/verification of shareholder signature from shareholder record and shares remain unsold ;
    • A letter of Indemnity (indemnifying the Company’s directors and the Registrar ) is then issued to the shareholder;
    • Upon execution of the indemnity letter, confirm the signature of the executing bank (or insurance company)
    Re-issuance Of Duplicate Certificate To A Shareholder
    • Procedure for Issuance of Duplicate Certificates
    • Indemnity letter must also be sealed and witnessed;
    • New certificate is then issue and logged into the system
    • Dispatch new certificate to the company secretary for signature and seal;
    • Send re-issue certificate to the shareholder.
    Re-issuance of Duplicate Certificate to a Shareholder
  • RE-ISSUANCE OF UNSTALED (Less than six months) DIVIDEND WARRANTS?
  • [Day 3]
    • Section 5: Measuring Returns, Indicators & Valuation Methods
    • Part A
    • Computing Stocks & Market Index Returns, Beta & Annual Volatility
    • Technical Analysis in the Equities Market
    • Part B
    • Valuation of Equities
    • Ratio Analysis in the Equities Market
    Training Course Outline
    • Section 5: Measuring Returns, Indicators & Valuation Methods
    • Part A
    • Computing Stocks & Market Index Returns, Beta & Annual Volatility
    • TECHNICAL
    • ANALYSIS IN EQUITIES MARKETS
    • Active & Passive Management
    • Both approaches to management do not completely exclude one another
    • For portfolio managers reconciling the two requires understanding both market and investor behaviour
    • Two extremes of market behaviour propose:
      • Efficient Market Hypothesis (EMH) states that all relevant information is impounded in market prices – stock picking is futile exercise
      • Market inefficiency where professional money managers are able to exploit short run advantages in sources and impounding of market information.
    Efficient Markets Hypothesis
  • TECHNICAL ANALYSIS
      • In the field of Finance, there are there exists two schools of analysts aimed at estimating securities prices – fundamental and technical analysts.
      • Fundamental analysts seek to determine security price by analyzing financial data (corporate accounts) on the company.
      • Technical analysts concentrate on the use of historical price and volume data to improve or enhance investment decision of what future price to buy or sell financial instruments.
      • Who is better at determining share price?
  • TECHNICAL ANALYSIS
      • The price of any security should reflect all the available information about such security.
      • Available information will include company financials data, management information, corporate actions, quarterly announcement, industry news and government policy thrusts.
      • In a market that is perfectly efficient, it is assumed that all available data and information have been incorporated into the security price and that all investors have access to the information.
  • TECHNICAL ANALYSIS
      • Why Price of security and not other data?
        • Price incorporates consensus and expectations of the investors i.e. buyers and sellers must agree to a price based on their expectation of future price of the security.
        • Sellers expect the price to fall while the buyers expect the price to rise in the future.
        • Expectation therefore is a major determinant of price action of any security.
      • How accurately can we price this expectation?
        • Given that investors in most markets are of diverse background with diverse emotions, fears, greed levels, investment needs and market knowledge, it is impossible to aggregate and quantify these expectations in order to know the implications on price action.
        • Not accurate . Our inability to determine with accuracy what the consensus price should be.
        • Researches in the field of Behavioral finance are currently examining these human factors.
  • TECHNICAL ANALYSIS S/N PRICE FIELD FIELD DESCRIPTION 1. LCLOSE This the previous day closing price of the security.   OPEN This represents the first trade done at the open of the market. The consensus price agreed upon by two or more traders as orders begin to be matched. 2. HIGH The highest price for which brokers traded the security during a trading session. The maximum price should not exceed 5 per cent of the previous day closing price . This is also the highest price at which any buyer was willing to buy during the trading session (resistance beyond this point). 3. LOW The lowest point at which brokers traded the security during the session. The lowest price should not be less than 5 per cent below previous day closing price . This also represented the lowest point sellers were willing to consummate trades with buyers in the market. 4. CLOSE The last price at which buyer(s) and seller(s) consummated a trade just before the close of the trading session. This is the price often reported to the investing public by the media!
  • TECHNICAL ANALYSIS S/N PRICE FIELD FIELD DESCRIPTION 5. CHANGE The difference between the previous day closing price and today closing price. This change should be within the band of –5.0% and +5.0% of the previous day closing price. 6. DEALS/TRADES This is the number of deals carried out between buyers and sellers during the trading session. Note that deals are counted on the basis of trading between clients’ accounts and not on broker basis – a broker can be a buyer and seller simultaneously using different accounts (case of cross deals). 7. VOLUME This is the total number of security (shares) traded during the trading session. 8. VALUE This is the value of trade carried out on a security during the trading session. Always difficult to determine on the face of the price report.
  • TECHNICAL ANALYSIS
      • Elements of Technical Analysis
        • time element or the periodicity of these parameters is equally very important.  
        • Time being continuous while these parameters are discrete therefore requires that we first determine the periodicity of the parameters in any technical analysis exercise.
        • The periodicity of time dependent parameters simply refers to the intervals between which the parameters are measured or captured. Irrespective of the chosen interval (per second, hourly, daily, weekly, monthly, yearly etc.) the basic principle of technical analysis always holds.  
  • TECHNICAL ANALYSIS
    • Moving Average and its use in Technical Analysis
      • A moving average is an average value of security’s price over a specified period of time. Changes in the average security’s prices will change the moving average prices.
    • Calculating Simple Moving Average
      • Add the closing price of the security most recent prices for a number of the period (e.g. 5 days) then divide by the number of time period i.e. Sum (n-most recent data)/n
    Speculative/day Trading 5-12 days Short Term Trading 14-25 days Medium Term 25-100 days Long Term 100-200 days
  • TECHNICAL ANALYSIS
    • HIGHS-LOWS PRICE ANALYSIS
      • A market momentum indicator used to determine the cumulative total of the differences between the total number of stocks attaining new highs and new lows within a specified period – usually 52 weeks.
      • i.e. Current H-L value = (New Highs – New Lows) + Previous day H-L
    • Similar to the market index (e.g. NSE All-Share Index), use the indicator to determine market trend.
      • A reversal of the direction of this indicator from that of the market index usually portend a likely reversal of the market direction or market correction. 
      • A plot of the All-Share Index juxtaposed with the Highs-Lows is a strong indication of the market direction, going forward i.e. divergence during an uptrend market (measure by the index) indicate an approaching bearish market. The reverse also holds in a downtrend market.
  • TECHNICAL ANALYSIS
    • VOLUME BAR CHART
      • A zero-based means the bottom of each volume bar represents the value of zero. A relative-adjusted is done by subtracting the lowest volume that occurred during the period from all of the volume bars.
    • SUPPORT AND RESISTANCE
      • Support is a price action at which buyers see investment in a share price as being worthwhile and at point in which sellers were not willing to sell for less than the support price. At the Support point, buyers are actually supporting the share price.
      • Resistance level is the point at which sellers take control of prices and prevent share price from rising higher.
  • Break! {10.30-11.00am}
    • Section 5: Measuring Returns, Indicators & Valuation Methods
    • Part B
    • Valuation of Equities
    • Ratio Analysis in the Equities Market
    • Valuation of Securities
    • Applicable Strategies
      • Intrinsic Valuation
      • Technical Valuation
      • Relative Valuation
      • Private Information
    • Which method deliver superior return in the long-run?
    Active Asset Selection
    • Absolute Valuation
      • Also referred to as Intrinsic Valuation
      • High amount of assumptions must be made with regards to the variables under consideration.
    • Relative Valuation
      • Less assumptions with regards to the variables under consideration.
    Absolute & Relative Valuation
    • Absolute Valuation
      • Discounted Cash flow valuation method
      • Equity Price=P o = DPS/(K e – gn)
        • DPS = expected future (next) year dividend per share
        • K e = cost of equity
        • G n = expected growth rate
    • Tricky! We must make assumptions with regards to DPS and g n .
      • Compare computed equity price (Po) to price in the market
      • Computed equity price (P o ) > price in the market => stock undervalued in the market
      • Computed equity price (P o ) < price in the market => stock overvalued in the market
    Absolute (Intrinsic) Valuation
    • Absolute Valuation
      • Discounted Cash flow valuation method
    • Relative Valuation( relative to market price)
      • Relative to generated Earnings (Earnings Multiple)
      • Relative to Book value (or replacement cost)
      • Relative to generated Revenue (Revenue Multiple)
    Methods – Absolute & Relative Valuation
    • Valuations using this model rely on the total assets (less liabilities) value of the company
      • Accountants valuation of business – based on earnings and book value
      • Dependent on the original cost of assets
      • Subject to accounting adjustments
    • This valuation model compares the equity market price with the book value of business equity assets to confirm over-valuation or under-valuation of equity price.
    • For corporate valuation, compare the book value of all assets to the value of the business.
    Asset Based Methods
    • Earnings Multiples
      • Look at market price as a function of the earnings per share of the business
      • Price-Earnings ratio
      • Market Price/Earnings-per-share
      • Number of times that EPS is repeated in the market price (2X, 3X….NX)
    • However, what earnings should we consider?
      • Current/historical earnings ( trailing earnings ) or
      • Forecast/future earnings ( forward earnings ) ?
    • Always, compare similar PER type in line with the earnings
    • Is a lower PER better than a high PER?
      • Yes but not always!
    • A high growth company will have a high PER – future priced into the share price
    • Any business prone to being acquired (at a premium) will have a high PER.
    Relative Valuation – Earning Multiples
    • Seeking PER
      • We assume that the company is quoted/listed
      • Determine Net Earnings of the business
      • Compute Net earnings per share (outstanding shares in issue)
      • Net Earnings – (after tax & interest payment but before dividend)
      • Not Profit After Tax as commonly use
      • EPS – Net earnings dividend by outstanding shares
      • PER – market price dividend by EPS
      • How many times in the company earnings replicated in the share price? 2X, 3X,….Nx multiples
      • Note: 1. only compare PERs of companies in the same industry/sector
      • 2. Give consideration to their sources of earnings.
    Valuation – Earnings Basis
    • Revenue Multiples
      • Look at market price as a function of the sale/revenue per share of the business
      • Price-Sale ratio
      • Market Price/Sale-per-share
      • Number of times that the sale-per-share is repeated in the market price (2X, 3X….NX)
    • Advantages of using Revenue multiples
      • Revenue/Sale figures are less affected by accounting rules and principles
      • Comparison across industries becomes more reliable under this valuation method.
    Relative Valuation – Revenue Multiples
    • Deriving Multiples from Intrinsic Value
      • Consider a dividend discount model for equity value = P o = DPS 1 /(K e – G n )
      • Divide equation by earnings figure
      • For a forward-looking earnings valuation
        • P o /EPS 1 = PER = DPS 1 /EPS 1 . 1/(Ke – Gn)
        • = Dividend-payout-ratio * 1/(K e – G n )
      • For a trailing earnings valuation
        • P o /EPS 0 = PER = DPS 1 /EPS 0 . 1/(K e – G n )
          • = DPS 0 (1+G n )/EPS 0 . 1/(K e – G n )
      • = DPS 0 /EPS 0 * (1+G n )/(K e – G n )
      • = historical dividend-payout-ratio * (1+G n )/(K e – G n )
    From Intrinsic to Relative Valuation
  • A company with a required rate of return of 15%, a dividend payout of 40% with a return on equity of 18% in a market with a risk free rate of return of 7%. What is the P/E ratio of the company? Applications (looking out for constant growth rate)
    • Solution
    • Stock price = P 0 = Dividend (D 1 )/(k – g)
    • P 0 /E = [D 1 /E]/[k-g)]
    • Growth = (1 – payout ratio) * ROE
    • = (1 – 0.40) * 18%
    • = 10.8%
      • P/E = [0.40]/[0.15 – 0.108] = 9.5X
    • A company has a beta of 1.2 (more volatile than the market) with an earnings growth rate of 8% and a dividend payout of 40%. Expected return in the market portfolio is valued at 11% with a treasury bill yield of 5%. What is the current P/E ratio?
    Applications (looking out for cost of equity - k)
    • Solution
    • Stock price = P 0 = Dividend (D 1 )/(k – g)
    • P 0 /E = [D 1 /E]/[k-g)] [D 1 /E] = 40% g= 8%
    • Using Capital Asset Pricing Model (CAPM)
    • K = R f + beta * (R m – r f )
    • = 5% + 1.2*[11% - 5%] = 12.2%
      • P/E = [0.40]/[0.122 – 0.08] = 9.52X
    • A company with an earnings retention rate of 55% and an implied cost of equity of 13%. Next year projected earnings was computed as N2.95 with growth rate at 8%. What is the forward looking P/E ratio?
    Applications
    • Solution
    • Stock price = Dividend (D1)/(k – g)
    • Dividend = earnings (1 – retention rate)
    • [note; dividend/earnings =payout ratio = 1 – retention rate]
      • = 2.95(1 – 0.55)
      • = 1.3275
      • Current Price = 1.3275/(0.13 – 0.08) = N26.55
      • P/E = 26.55/2.95 = 9X
    • In favour of PE Ratio
      • The only valuation provided by the NSE Official List Report (SEDOL)
      • Makes sense to both professionals/institutional and retail investors alike
      • Uses less assumptions compared to discounted cashflow method
      • Easiest to compute and explain
    PE Ratio Advocates
    • Drawbacks of PE Ratio as an investment decision tool
      • It disregards other valuation method – low PER is it!
      • Seeking low PER using training earnings can be very deceptive. What about arriving or soon-to-be-published earnings?
      • Not comparable across industries. Why?
      • What happens when earnings are negative? Use Price to Sales ratio (start-up companies – little or no earnings)
      • Uses earnings NOT cashflow
      • Inflation dependent. Higher inflation tends to lead to higher PER for equities.
      • Price to Cash Flow (P/CF) has an advantage over P/E because unlike earnings, cash flows are NOT influenced by the choice of accounting methods.
    PE Ratio Advocates
    • Playing games with earnings
      • Deferring expenses that should have been deducted to save taxes
      • Valuable acquisitions avoided in order not to amortise goodwill against earnings
      • Investors/shareholders are more interested in value than in earnings! Enter EVA (Economic Value Added).
    PER – Behind the scene!
    • In Brief
      • EVA = Operating Profit – costs of capital employed to generate the earnings
      • EVA up if minimal cost is used to generate operating profit (tie down less capital!)
      • Use new capital to invest in projects that will not result increase cost of funding to the business (FBN excess cash challenge).
      • Divert capital from business activities providing less return (CAP Plc scenario)
      • A negative EVA destroys value!
      • Management should invest in projects with returns above the cost of capital.
    EVA – Economic Value Added
    • Equities Research
  • It is all about determining the future price of securities today .
    • In a bullish market, every investors and speculators suddenly become analysts but a professional research analyst remain unwavering in bullish & bearish markets.
    • “ show me an ideal investor who can carefully read, analyze, make sense of market data (amidst the daily market noise) and I will show you a professional research analysts”
    Equities Research - Introduction
    • This Research Report is based on information available to the public from sources we believe to be reliable, but their accuracy or completeness cannot be guaranteed.
    • We disclaim all liability arising from its use. This is not an offer to buy or sell or a solicitation to buy or sell the securities mentioned herein.
    • We have expressed all opinions in good faith but are subject to change without notice.
    • The Company may effect transactions in securities of companies mentioned herein and may also perform or seek to perform investment management services for those companies mentioned herein.
    Equities Research - Introduction
    • Know your audience/readers (this helps to determine your language level)
    • Be economical in your use of words and ensure tightly coupled sentences
    • Use data in tabular layout rather than attempting to discuss data
    • For professional research reports, keep the number of pages to the required minimum, your readers time is important
    What you should know
    • Company financial accounts
    • Investors relations department/desk
    • Regulators and Exchanges
    • Public sources – newspapers, libraries etc
    • Analysts (Brokers) Research Reports
    • Trade associations
    • Other stakeholders – suppliers, customers/clients
    • Competitors
    • Rating agencies
    Data & Information Sources
    • Top-down:
    • The top means the real top and analysing the health of the global economy
      • What are the major influences that are the most important in the current global economic environment ?
    • Analysis of specific regional influences that have a more specific influence on a national economy and its prospects
      • What are the major influences within the African and West African trade economic blocs?
    Top-down & Bottom-up Approaches
    • Top-down:
    • The natural extension of macro-economic analysis to perform is the review of the national economy
      • Fiscal Policy
      • Monetary Policy
      • Strength of Local Institutions (Legal and others)
      • GDP growth rates
      • Economic Dependency on a particular industry or industries
      • Inflation levels and trends
      • Employment
      • Levels of Manufacturing Output
    Top-down & Bottom-up Approaches
    • Top-down:
    • Putting together the various elements of this macro-economic analysis is important to assess the longevity of current economic trends
      • Inter-relationship between the state of the global or regional economy and the national economy
        • Are export markets weakening ?
        • Are international capital markets drying up as sources of externally available credit
        • Are there fresh competitors in the markets ?
    Top-down & Bottom-up Approaches
    • Top-down:
    • Final step in the macro-analysis is to analyse the major index
    • Determine the internal health of the index by utilising techniques of fundamental or technical analysis
    • Fundamental analysis tools such as assessing price-to-earnings/growth ratio, return on equity or dividend yields are important historical comparatives
    • This will help to assess whether markets are over or undervalued relative to historical standards
    Top-down & Bottom-up Approaches
    • Top-down:
    • In addition to fundamental analysis , technical analysis may be applied to assess the long and short term state of the market
    • Tools such moving averages, relative strength indexes momentum and Elliott Wave may be used depending on the skills and preferences of the practitioner
    • Technical analysis will often be used in conjunction with fundamental analysis, concentrating on weekly and/or daily charts to time entry into the market
    Top-down & Bottom-up Approaches
    • Positive features of Top-down analysis:
    • Argument often advanced is that top-down analysis allows portfolio managers to make appropriate asset allocation decisions in all market conditions
    • Important consideration in deciding whether to invest in equities or other asset classes such as bonds or commodities
    • Argument may be extended one step further to decide upon allocation of capital between different market sectors within the broad equity market
    • May also extend to the selection of foreign markets
    Top-down & Bottom-up Approaches
    • Positive features of Top-down analysis:
    • Top-down analysis is usually the preserve of market strategists
    • Market strategists are often quicker to downgrade earnings if macro-economic conditions warrant it
      • Why would this be a feature of numerous academic studies ?
    • Market strategists also tend to be less optimistic than stock analysts
      • Why would this factor emerge ?
    Top-down & Bottom-up Approaches
    • Negative Features features of Top-down analysis:
    • If broad market research is wrong or inaccurate it may lead to an over/(under) exposure to equities as an asset class
    • Prior sectoral analysis may eliminate entire sectors thereby missing profitable single stock opportunities in which sector leaders or bargain stocks are never identified.
    Top-down & Bottom-up Approaches
      • Module A: Introduction to Money Market Instruments
      • The role of Money Market in Financial intermediation
      • Classifying Short-term and long-term funds in the market
      • Matching of funds in the Money Market
      • Managing mis-matched Funds in the Money Market
      • Dynamics of Deposit and Loans in the Money Market
      • Understanding Synthetic Deposits and Loans
    SESSION 1 : Introduction to Financial Market Instruments
  • SESSION 1 : Introduction to Financial Market Instruments
      • Module A: Introduction to Money Market Instruments
      • Handling dates in the Money market
      • Money Market Instruments
      • Deposits & Loans
      • Bankers’ Acceptances & Commercial Papers
      • Treasury Bills
      • Euronotes & Eurocurrency
      • Repo (Repurchase)
      • Forward Rates Agreements
      • Swaps
  • SESSION 1 : Introduction to Financial Markets Instrument
    • Module B: Introduction to Financial Markets Instrument
    • The Capital Market & Instruments
    • Accounting for Financial Instruments
    • Simple & Compound rates of return
    • Future Value of the Money Market Instruments
    • Valuation Methods
      • Equities & Bonds
      • Money Market Instruments
      • Discounted Instruments
    • Yield Analysis
  • SESSION 1 :Introduction to Financial Markets Instrument
    • Module B: The Capital Market & Instruments
    • Treatment of Dates in Financial Computation (Day Count & Annual Basis Conventions)
    • Discounted Cash Flow Analysis: NPV and IRR
    • Calculating Net Present Value (NPV)
    • Calculating Internal Rate of Return (IRR)
    • Background to Bond Analysis
    • Bond Calculations
    • Bond Price & Bond Yield
    • Equity (Stock) Market
    • [Primary Market]
    • Understanding Primary Market
    • Transactions
  • Capital Raising Issues
    • Capital Structure
    • Equity Securities
    • Debt Securities
    • Quasi Securities (Preferential, Convertibles, Warrants, etc)
    • Merger & Acquisition
    • Listing
  • Capital Raising Methods
    • Initial Public Offerings – IPOs
    • Offer for Subscription
    • Rights Issue
    • Private Placement
    • Listings Requirements
  • Underwriting and Securities Placing
    • Underwriting
      • Firm Basis
      • Stand-by Basis
      • Best Effort
    • Placing
      • Best efforts
      • Reasonable Endeavours
    • Book-building
  • Players/Parties in Capital Raising
    • Company/Issuer
    • Directors
    • Selling Shareholder
    • Sponsors ( Mutual Funds)
    • Issuing House
    • Stockbrokers
    • Reporting Accountants
    • Solicitors
      • To the Issue
      • To the Company
    • Receiving Bank
    • Registrars
    • Others (Book runner, Lead managers, etc)
  • Prospectus/Red Herring
    • Describes the business and operations of the company
    • Must contain five years audited accounts and ‘Management’s Discussion and Analysis’
    • Must contain a forecast and assumptions of the forecast
  • Due Diligence
    • Issuers assume responsibility for the information contained in the prospectus
    • If false, or misleading, can be sued and face criminal charges
    • Issuing conduct a due diligence process in order to verify the information contained in the prospectus.
    • Process of ensuring every statement in the listing particulars can be supported
    • Directors must take responsibility for contents of entire prospectus
  • Underwriting
    • Sponsor underwrites the offer on the day of pricing: Impact Day
    • Issuer is guaranteed to receive the proceeds at this point
    • Underwriting period can vary
  • Stabilization Process
    • Bookrunner allocates more shares than are on offer (i.e. goes short--sells shares that it doesn’t own)
    • If share price falls
        • the bookrunner buys shares in the market to cover its short position
    • If share price rises
        • exercise the green shoe clause in the Underwriting Agreement (at the original issue price) to cover its short position
  • Understanding Depositary Receipts
    • Convenient mechanism for transferring ownership, receiving dividends and taking care of routine matters
    • Eases international investment
    • Shares are ‘deposited’ with a bank which issues DR’s which are then traded outside the issuer’s home market
  • ADR’s / GDR’s
    • American Depositary Receipts trade in dollars
    • First issued in 1920’s by a number of Scandinavian companies
    • Global Depository Receipts trade in dollars or sterling
    • More popular for emerging market issuers
  • Private Placement
    • This is when shares are sold to a limited number of institutional investors and high-net worth individuals.
    • There is no much publicity when private placement offers are on sale.
    • * This offer is outside the purview of The Nigerian Stock Exchange and SEC.
  • Initial Public Offering
    • When a firm has been in operation for a least five years, it qualifies to apply for capital raising exercise.
    • Other conditions needed to be met are :
    • Publication in at least a national daily, the items listed below:
    • Application forms are obtainable from designated stock broking firms and banks.
    • Receiving agents have two weeks to render their returns.
    • Results of allotments are announced by the issuing houses.
    • In case of oversubscription, units offered for sale are allotted on pro rata basis.
    04/04/11 Initial Public Offering
    • Certificates are dispatched starting from the date indicated in the allotment notice.
    • In case of oversubscription, return money cheques are sent to applicants that are affected.
    • The last stage is listing of the company on the floor of the NSE.
    04/04/11 Initial Public Offering
  • Analysis of GTB 100% Book-Building Issue Bond – [N200B Senior Unsecured Non-Convertible Debt Programme] Case Study – Analysis of Issued Bonds
  • Book building Approach
    • Attempts to determine the maximum price and maximum demand for the securities (equities or bonds) prior to setting the price.
  • Analysis of GTB 100% Book Building Process – Understanding Book Building Process Draft Prospectus registered with SEC Public Offering of Securities via book building Appointment of Book-runners Issue draft Prospectus (Red Herring) with required Disclosure – no fixed coupon rate and volume being sold Bidding Process Begins via syndicates Coupon price discovery begins via bidding process Bidding closes Issuer and Book runner (s) decides on volume and coupon Rate File Full Prospectus with SEC
  • Analysis of GTB 100% Book Building Process – Understanding Book Building Process 100% or less advance along with application 100% advance payment before allotment Payment Everyday as the book is built – ‘electronic book’ Only after closure of offer Demand Not Known but only price range Known in Advance Pricing Book Building Process Fixed Price Process Feature
    • The Equity (Stock) Market
    • Equity (Stock) Market
    • [Secondary Market]
    • Equity (Stock) Market
    • Benefits
  • Introduction
    • The desire to make profit is the rationale behind most economic activities.
    • Some economic activities take place with the use of real assets i.e., land, building, machines ,while others are done with financial assets.
    • Investment in stocks falls within the category of the economic activities done with financial assets.
    • What is a stock ?
    • A stock can be defined as a share of a corporate capital or a certificate of ownership in a company. It gives you a claim on the company’s profits.
    • These include equity shares, preference shares and government stocks.
    • An investment on the other hands means the postponement of immediate consumption of goods and services for greater and better consumption in the future. Examples are savings, buying of shares, acquisition of a landed property, education etc.
  • Investment Types and Benefits
    • Savings – The portion of our disposable income not spent on consumption.
    • Interest is paid on most savings accounts. However, savings do not offer exceptional return.
    • Most commercial banks, microfinance banks and other specialized institutions operate savings accounts throughout the country.
  • Duration of Stock Investment
    • Investment in the stock market has about three durations-short , medium and long terms.
    • Short term is between 6 months and 1 year
    • Medium term investment is between 1 and 5 years
    • Long term range : When the objective of share acquisition does not fall under the categories identified above, it becomes a long term investment.
  • Secondary Market
    • This market is for the trading of shares of companies already listed.
    • For effective secondary market transactions, you need the followings:
    • CSCS Account- This account is domiciled with the Central Securities and Clearing System (CSCS) but operated by your stock broking firm.
    • When you approach a stock broking firm, an Account Opening & KYC (Know-Your-Client) Form is given to you wherein you supply all necessary data about yourself
    • Organizations or businesses can equally open this account, but have to produce two signatories.
    • Signature specimen are taken, which will be verified whenever stocks are to be sold from the account.
    • To buy or sale shares from your account, you need to produce a buy or sale mandate form. It can be done electronically with the aid of internet.
    • Contract note is given as an evidence for the trade executed.
    • Investors are to request for CSCS statement to know their stock position.
  • Stock Selection Criteria
    • Investment objective plays significant roles in choosing the stock to buy.
    • Age of the investor
    • The level of risk the investor can take
    • Amount available
    • Investor’s preference
  • Stock Selection Processes
    • By means of Technical Analysis -Chats, graphs, returns, standard deviation, etc
    • By using Fundamental analysis - Intrinsic and relative valuation
    • Analyst’s Recommendation- Published research work from reliable organizations.
  • Sources of Information
    • Published annual reports and accounts of companies.
    • Quarterly results published by The Nigerian Stock Exchange weekly
    • Business journals, newspapers both local and foreign
    • Information from the grapevine
  • Benefits from Stock Investment
    • Capital Appreciation
    • Dividend Earnings
    • Receipt of bonus issues
    • Stocks can be used as collaterals for loans to take advantage of opportunities that abound in the economy.
    • Ratio Analysis in the Equities Market
  • Lunch! {2.00-3.00pm}
    • Session 6: Exposure to the Fixed Income Market
    • Introduction - Understanding Fixed Income
    • Background to Fixed Income Instruments & Markets
    • Fixed Income Issuers - Governments (Federal, States & Municipals) & Corporates
    • Roles of Bond Primary Dealers and Secondary Market Traders
    • Objectives of Issuing Fixed Income Instruments
    • Role of Fixed Income Instruments in Portfolio management
    • Bond Types and Uses: Straights, Callable, Convertible, Zeros, etc
    • Methods of issuing bonds (at par, below par and above par)
    Training Course Outline
  • Introduction – Fixed Income Securities
    • A fixed Income instrument is an obligation that pays a known (?) (cash flow) interest on a borrowing over an agreed period of time.
    • Popular fixed income instruments are BA, CP, treasury bills and bonds.
    • Repayment is made by the issuer (borrower/debtor) to the investors (creditors/lenders) at the expiration of the debt.
  • Introduction – Fixed Income Securities
    • Repayment of principal and interest (coupon) can also be structured as a periodic repayment.
    • Mostly, the principal debt is repaid at the expiration of the agreed borrowing period ( bullet repayment ).
    • Principal can also be repaid in tranches during the life of the debt.
    • Interest portion of the obligation is repaid at specific points in the life of the instrument.
  • Introduction to Bonds as a Fixed Income Securities
      • Most debt instruments structure the payment of interest, usually on a six-monthly basis, to ease cash flow while principal repayment is paid at the maturity or expiration of the debt.
      • The issuer and the investors are bound by the bond indenture managed by the Bond Trustees during the life of the bond.
      • The indenture states the features of the bonds and the obligations of the issuer during the life of the bond.
  • The Structure of Fixed Income as Funding Sources in Nigeria (Corporates & Government)
    • Bank Borrowings (CP, BA, Notes, bonds)
    • Corporate Bonds
    • Municipal Bonds (case of Lagos Island Municipal)
    • State Government Bonds
    • Federal Government Bonds
    • Government (Treasury Bills & Notes)
  • Types of Bond Issuers (Government & Corporate)
    • Types of Bond Issuers
      • Local Government
      • State Government
      • Federal and
      • Corporate Bodies
    • Bond Projects Classification
      • Infrastructure
      • Development
  • Characteristics & Features of Bonds Rates
    • Zero/nil rate
    • Fixed Rate
    • Floating Rate
    • Redeemable
    • Irredeemable
    • Call and Non-Callable
    • Cap and Floor on coupon rate payable on bonds
  • Benchmarks for Coupon Rate Determination
    • Identifying appropriate benchmark for Bond Pricing
    • Reference Rates for coupon pricing
      • Nigeria Inter-Bank Rate (NIBOR)
      • Minimum Rediscount Rate (MRR)
      • Monetary Policy Rate (MPR)
      • Treasury Bill
      • LIBOR (Fx based transactions)
    • Market Rate and Yield determination
  • The Risk Free Factor - Treasury Bond Market
    • Why can we say that the Treasury (gilt edged) bond market is the fundamental bond market?
    • Lowest risk (no default)
    • Market size
    • =>Forms the Benchmark
  • Rating Classes For Bonds S&P: +:Strongest Rating; -:Weakest Rating and Moody’s: 1:Strongest and 3: Weakest Rating Investment Grade Bonds High Yield/Junk Bonds Moody’s S & P Definition of classification Aaa AAA Very High Quality Rating. Strong capacity to pay interest and principal upon maturity. Aa AA A A High Quality Rating. Principal and interest likely to be affected by adverse economic conditions. Baa BBB Ba BB Medium Grade Obligations. Speculative Quality Rating in terms of Principal and Interest Repayment. B B Caa CCC Poor Quality Rating with degree of Speculation in terms of Principal and Interest Payment with large uncertainty and major risk. ‘C’ for bonds where interest has not been paid. ‘D’ describe bonds in default in payment of interest and/or repayment of principal in arrears. Ca CC C C D D
  • Packaging Bonds with Attractive Features
    • Rating Application
    • Redemption (moratorium on redemption)
    • Tax Exempt Status
    • Tradability
    • Security on the back of ISPO
    • Bond Guarantee
    • Sinking Fund Provision
    • In making a bond instrument to be attractive, flexibility are introduced with the inclusion of embedded options in the bond.
    • These provisions will enable the issuer and/or the investor to exercise some rights during the life of the bond.
    • Types of Embedded Options
      • Call provision
      • Put provision
      • Convertible provision
      • Exchangeable provision
    Packaging Bonds with Attractive Features
    • Call provision:
      • Provides the issuer with the right to retire, either fully or partly, the some or all the outstanding debt on the bond.
      • This is to the benefit of the issuer in that expensive coupon rate can be replaced with bond with cheaper coupon rate.
      • It is to the disadvantage of the investors! Put simply, a loan can be repaid at any point before the maturity of the loan.
    • Put provision:
      • This embedded option will allow bondholders to be able to change the maturity of the bond.
      • In a rising interest rate market, the investor can sell the bond to the issuer at par value in spite of the drop in the bond price.
      • This is to the advantage of the investor! A lender can request for a repayment before due date.
    Packaging Bonds with Attractive Features
    • Convertible provision:
      • The investor has a right to exchange the bond for an agreed number of other securities – mostly equities , before or at the maturity of the bond.
      • This is to the advantage of the investor particularly if the securities to be converted to moves in favourable direction.
    • Exchangeable provision:
      • This allows the bondholder to exchange the bond for securities of company different from the issuer .
      • This is to the advantage of the investor.
      • It is these varieties of options features that make bond valuation a bit ‘uninteresting’!
    Packaging Bonds with Attractive Features
  • Cash Flows For Bonds with Call Provision (@ the instance of the Issuer ) 6 th Month 6-Monthly Cash flow Payment at Maturity fixed fixed cancelled cancelled Early repayment 12 th Month 18 th Month 24 th Month N1,000.00
  • Cash Flows For Bonds with Call Provision (@ the instance of the Issuer )
    • Bonds with Call Provision
      • Why embedding a Call Provision?
      • Who benefit from a Call Provision Clause?
      • How will the Pricing be affected?
      • When will a Call Provision be triggered?
  • Cash Flows For Bonds with Call Provision (@ the instance of the Issuer ) Using a Call Provision Clause to achieve Refunding Operation
  • Cash Flows For Bonds with Put Provision (@ the instance of the Investors ) 6 th Month 6-Monthly Cash flow Payment at Maturity fixed fixed cancelled cancelled Early repayment 12 th Month 18 th Month 24 th Month N1,000.00
  • Cash Flows For Bonds with Put Provision (@ the instance of Investors )
    • Bonds with Put Provision
      • Why embedding a Put Provision?
      • What are the downsides to Investors and Issuer?
      • How will the Pricing be affected?
    • When will a Put Provision be triggered?
  • Cash Flows For Bonds with Provisions (@ the instance of Issuer )
    • Understanding Bonds with:
      • Exchangeable Provision
      • Convertible Provision
  • Bonds Investment & Associated Risks
    • Risk Associated with bond investment
      • interest-rate risk
      • reinvestment risk
      • call risk
      • default risk
      • other risks are – liquidity risk, volatility risk and risk of risk .
      • Unquantifiable Risks/Operational Risk
  • Risks Associated with Bonds Explained
    • Understanding Interest-rate risk
      • To understand the relationship between bond price and the interest rate movement, you must have a view of a market where bond is being traded and a view of an existing bond with a known coupon (interest) rate.
      • The market view brings to mind the inverse relationship between interest rate and the price of a bond.
      • Bear in mind that an investor must have bought the bond at a known purchase price – at the par value, above par value or low the par value.
  • Risks Associated with Bonds Explained
    • In attempting to sell a bond, a rise in the market interest-rate will result in a lower bond price hence resulting in a capital loss to the seller.
    • The reverse is true when the market interest rate falls. In this case, the market price of the bond will be higher than the purchase price of the bond – hence a capital gain situation for the investor.
  • Risks Associated with Bonds Explained
    • This is the idea behind interest rate risk in bond! Applicable when a bond is sold before maturity.
    • Re-Investment Risk
      • This is the risk associated with re-investing bond proceeds at a rate lower coupon rate than the previous coupon rate.
      • A rising interest rate create less re-investment risk
      • A rising interest rate creates a capital loss and hence an increased interest rate risk.
  • Risk Associated with Bonds Explained
    • Call Risk
      • When a bond includes a provision for the issuer to exercise an early (before the maturity date) redemption or retirement of the bond, investors in such bonds are faced or expose to a call risk.
      • As initially highlighted, a call feature is to the advantage of the issuer but to the disadvantage of the bondholders.
  • Risks Associated with Bonds Explained
    • Issues with Bonds with Call Provision Clause:
      • Cash flow pattern no longer certain
      • re-investment will be done by investors at lower interest rate because this is when it is favourable (to the issuer) to call the issued bond thus resulting in re-investment risk to the investors
      • Volatility on a callable bond is usually low hence low capital appreciation.
  • Risks Associated with Bonds Explained
      • Default (Credit) risk
      • This is the risk that the issuer will default on the payment of interest and/or principal sum on or before maturity of the bond
      • Measuring the possibility of default during the life of the bond is always difficult
      • Hence, the need to rate Bonds.
      • In rating, the issuer and/or the project can be rated depending on the structure of the bond and the cash flow sources.
  • Risks Associated with Bonds Explained
      • Inflation Risk
      • Given that most bonds carry a fixed coupon rate while inflation rate changes during the life of a bond, real return to investors will always be at risk due to potential drop in the value of the cash flow going to bond investors
      • For this reason, investors prefer bonds with floating coupon rate that adjust for inflationary effect.
      • Hence, a fixed coupon rate bond is riskier than a floating rate bond.
  • [Day 4]
    • Session 7: Practical Side to Fixed Income
    • Part A
    • Regulatory Roles in Bonds Registrations & Documentation
    • Bond Projects Classification (Infrastructure, Development)
    • Identifying appropriate benchmark/reference rates for coupon pricing ( NIBOR, MPR , Treasury Bill, etc)
    • Bond Rating System and Importance
    • Practical Cases:
      • Cross River State (Obudu Ranch) Development Bond & Lagos State & Kwara State Bond Issuance
      • Corporate Bonds: Guaranty Trust Bank Plc – Fixed Rate Book-Building Bond
      • Federal Bonds – Selected Issues
    Training Course Outline
  • Understanding Bond as Fixed Income Securities)
    • The higher the interest rate to be received on a bond investment, the lower the present value of the bond, for a given future cash flow.
    • The price of a bond is the present value of the cash flows. A reduction in the present value of the cash flow will result in a drop in the bond price if the required or expected return (yield) rises.
    • This brings about an inverse relationship between price of bond and its yield.
  • Understanding Bond as Fixed Income Securities) Price of a bond Yield of a bond
  • The Roles of Trustees in Bond
    • Confirmation of Indenture Legality
    • Registration & Confirmation of Bond Certificates
    • Receipt and Disbursement of Interest & Principal Due
    • Liaising with Registrars on the Payment of Interest & Principal
    • Cancellation/Redemption of Bonds in part and in full
    • Status of the Sinking Fund Account.
  • Redemption/Cancellation of Bonds
    • Redemption: Redemption allows for early cancellation of the bond.
    • A moratorium period can be arranged during which redemption can not be exercised.
  • Repayment Sources For Bonds
    • Other Invested Projects
    • Self Repayment Projects
    • Cash flow from business
    • Internally Generated Revenue (IGR)
    • Irrevocable Standing Payment Order ( via Statutory Allocation )
    • Bond re-issuance
  • Repayment Sources For Bonds
    • Other Invested Projects
    • Self Repayment Projects
    • Cash flow from business
    • Internally Generated Revenue (IGR)
    • Statutory Allocation (via ISPO)
    • Bond re-issuance
  • Statutory Allocation as Repayment Sources
    • In ensuring repayment on most State Bonds:
      • The State will be required to give the Accountant-General of the Federation an Irrevocable Standing Payment Order instruction (ISPO) to deduct (at source) an agreed amount against the State’s Statutory Allocation Account.
      • For credit into a Sinking Fund Account with the CBN on a monthly basis for payment of Coupon and/or Principal upon maturity.
      • It is the responsibility of the Issuer and the Bond Trustee to ensure that this is effected on a monthly basis.
  • a. Issue date – Inception date of the bond b. Maturity date - date the bond will cease to exist. The principal amount on the bond can either be settled at maturity or repaid over the life of the bond at pre-agreed periodic points in the form of amortization repayment . c. Term to Maturity – period remaining to the expiration of the bond. Term to maturity can be altered by either the issuer or the bondholder depending on the structure of the bond. Date Features of Bond Instruments
  • Characteristics of Bonds (called Coupon or interest rate)
    • Coupon Rate: The coupon rate is the interest rate that the issuer has agreed to pay at specific periods in the life of the bond
    • Could be annually or semi-annually
    • The interest amount is referred to as the coupon
    • Why is the interest called coupon?
  • Characteristics of Bonds (called Coupon or interest rate)
    • Computing the coupon of a bond
    • The coupon amount is determined by the application of the coupon rate on the bond par value for the interest period.
    • For a bond that pays annual coupon, Apply the coupon rate to the par value
  • Coupon Rates in Bond Transactions
    • A common feature of most floating coupon rates is to have a periodic reset of the benchmark rate
    • The effective coupon rate will then be a function of the change in the benchmark rate
    • Bonds with this feature of coupon rate are referred to as floating-rate bonds
    • The coupon rate can also be structured to move in opposite direction to the benchmark rate. This is the case of a inverse floater !
    • Why? For hedging reason.
  • Computing the Interest on a Bond
    • Example 1:
    • A 2-Year bond is structured to have a coupon rate of 15 per cent with a par value of N1,000.00 and pays annual interest to its bondholders.
    • What is the interest payable per annum per unit of the bond?
  • = 15/100 * 1000.00 = (15*1000)/100 = N150.00 The bond will pay N150.00 as interest on each unit every year. What if the bond is expected to pay on a six-monthly basis or semi-annually? = (15/100)/2 * 1000 = (15*1000)/(2*100) = N75.00. In effect, the bond will pay N75 on each unit of bond every six months. Computing the Interest on a Bond
  • Cash Flows in Bond Transactions (Fixed Coupon) 6 th Month 6-Monthly Cash flow Payment at Maturity N75.00 N75.00 N75.00 N75.00 N1,000.00 12 th Month 18 th Month 24 th Month
  • Cash Flows in Bond Transactions (Variable Coupon) 6 th Month 6-Monthly Cash flow Payment at Maturity W X Y Z N1,000.00 12 th Month 18 th Month 24 th Month
  • A zero-coupon bond will NOT pay period interest! An investor in a zero-coupon bond buys below the par value of the bond and gets it redeemed at par on maturity. Why buy a zero coupon bond? Computing the Interest on a Bond
  • Cash Flows in Bond Transactions (Zero Coupon) 6 th Month 6-Monthly Cash flow Payment at Maturity nil nil nil nil N1,000.00 12 th Month 18 th Month 24 th Month
  • A zero-coupon bond carries no re-investment risk. Why? Computing the Interest on a Bond
  • Characteristics of Bonds (called Coupon or interest rate)
    • Pricing of Bonds
      • Before we can fully understanding how to price any bond, a good knowledge of time value of money (cash flow) is essential.
      • The price of a bond, is the effective sum total of the affected cash flows in the life of that bond
      • What will be the worth of an amount P invested for n periods if interest is paid at the end of each of the periods?
      • To know the value of P at the end of the period, assume the value of 1.00 invested today for n periods at a compounding rate of interest, r.
  • Understanding Bond Pricing
      • Future value of N1.00 = (1 + r ) n
      • Hence, future value of P = P * (1 + r ) n
      • Note: r is the interest rate payable per payment
      • period while n is the number of payment periods.
      • Paying interest of 5% per year on N5million invested for 2 years and assuming re-investment of the interest at each point of payment at the same interest rate.
  • Understanding Bond Pricing
      • At the end of the 2 years, total value =
          • 5,000,000 * (1 + 0.05) 2
    • = 5,000,000 * 1.103
    • = N5,512,500
    • This assumes that the interest is re-invested annually at the same rate of 5 per cent. Now assuming interest is to be paid every six months. What will be the total value?
    • Number of interest payment periods = twice yearly for 2 years = 4 periodic payments
    • Interest rate applicable for each payment period = 5 divided into 2 = 2.5 per cent
  • Understanding Bond Pricing
    • At the end of the 2 years, total value =
    • 5,000,000 * (1 + 0.025)4
    • = 5,000,000 * 1.104
    • = N5,519,065.
    • Interpret: The future value of N5,000,000 now is N5,519,065
    • This is higher than the initial value where interest is paid annually.
    • Why?
    • Answer-> re-investment of the interest paid
  • Understanding Bond Pricing
      • To understand the pricing of bonds, we need to determine the present value of the various future cash flows likely to come out of investing in the bond
      • This is the reverse of our future value of cash flow
      • Bonds, like other financial instruments are valued by determining the present value of all expected cash flows
      • Hence, bond valuation entails determining the present value of series of future cash flows
      • This is also refer to as discounting.
  • Understanding Bond Pricing Present value of N1.00 = 1 / (1 + r ) n Hence, present value of P = =P * [1 / (1 + r ) n ] Note: r is the interest (discount) rate to be earned per payment period while n is the number of periods that the interest will be paid. P is the future cash flow to be paid. The higher the interest rate to be received on a bond investment, the lower the present value of the bond, for a given future cash flow. Hence, the inverse relationship between bond price and interest rate.
  • Understanding Bond Pricing
      • In pricing bonds, the various promised payments (cash flows) are added after determining the present values of these future cash flows. What is important is to determine the cash flows and the specific points of payment.
      • Assuming a 5-year bond promised to pay N500.00 as interest at the end of each year and the principal of N1,000.00 to be repaid at the end of the 5th year. Also, assumed the issuer had promised to pay 12per cent per annum as interest rate.
      • The affected cash flows are:
    • End of Year 1 – N500.00
    • End of Year 2 – N500.00
    • End of Year 3 – N500.00
    • End of Year 4 – N500.00
    • End of Year 5 – N500.00
    • End of Year 5 – N1,000.00
  • Understanding Bond Pricing To determine the price of this bond, these identified future values should be discounted to the present period. Future Cash flow Present Value (PV) Cumulative Year 1 N500.00 500* 0.8929 = 446.43 N446.432 Year 2 N500.00 500 * 0.7972 = 398.60 N845.033 Year 3 N500.00 500 * 0.7118 = 355.90 N1,200.934 Year 4 N500.00 500 * 0.6355 = 317.76 N1,518.695 Year 5 N500.00 500 * 0.5674 = 283.70 N1,802.305 Year 5 N1,000.00 1000 * 0.5674 = 567.40 N2,369.70 The price of the bond is currently N2,369.70. Easy! Let’s play with some parameters!
  • Characteristics of Bonds (called Coupon or interest rate) P = C/(1 + r) + C/[(1+r) 2 ] + C/[(1+r) 3 ] + ……. + M/[(1+r) n ] = ∑ C*/[(1+r) i ] + M/[(1+r) n ] where M is the par value payable on maturity date and C is the semi-annual coupon payable by the bond. i runs from 1 to n . = A + B A = [C/r]*[1 – 1/(1+r) n ] This is the present value of coupon payments B = M/[(1+r) n ] Do NOT forget to treat r and n well! NOTE: For a zero-coupon bond, the A part disappears! Why? C = 0!
  • Understanding Bond Pricing Class work: A 5-year non-callable coupon bond with a par value of N1,000 promised to pay a fixed 10 per cent coupon semiannually. What is the price of this bond? Use the tabular format, then the formula. Good luck!
  • Understanding Interest Rate and Bond Pricing – in reality
    • If going market rate of interest is lower than the fixed Coupon rate
    • : Bond trades at a Premium to its face value
  • Understanding Interest Rate and Bond Pricing – in reality
    • If the going market rate of interest is higher than the fixed Coupon rate
    • : Bond trades at a Discount to its face value
  • Understanding Interest Rate and Bond Pricing – in reality
    • If the going market rate of interest is equal/near the fixed Coupon rate
    • : Bond trades at par to its face value
  • Bond Pricing, Coupon and Yield to Maturity Relationship The rate of return expected from a bond if held until Maturity is often called Yield to Maturity
  • Bond Pricing, Coupon and Yield to Maturity Relationship
    • Yield to Maturity < Coupon :
    • Bond trades at a Premium
    • Yield to maturity > Coupon : Bond trades at a discount
    • Yield to Maturity = Coupon :
    • Bond trades at par
  • Bond Pricing, Coupon and Yield to Maturity Relationship
    • Yield to Maturity Components
    • Interest (Current) Yield
    • Capital Gain (Loss) Yield
    • Note: If the Bond is held until maturity, the Capital Gain/Loss Yield will be nil . Only Interest Yield.
  • Bond Pricing, Coupon and Yield to Maturity Relationship
    • Interest (Current) Yield
        • =
    • Coupon/(Bond Purchase Price)
  • Bond Pricing, Coupon and Yield to Maturity Relationship
    • Capital Gain (Loss) Yield
        • =
    • Gain (Loss)/(Bond Purchase Price)
  • Bond Pricing, Coupon and Yield to Maturity Relationship
    • Total Rate of Return/Yield to Maturity
        • =
    • Interest Yield + Capital Gain (Loss) Yield
  • Understanding Bond Pricing The picture changes when a bond is purchased between interest payment periods. Modify the discount by: V = [days between settlement and next coupon/days in six-month period] and adjust A & B by 1/[(1+r) v ]
  • Understanding Bond Pricing A bond purchased between coupon payments will required that the seller be compensated for the interest earned from the time of the last coupon payment to the settlement date of the bond as accrued interest. The seller will then pay the price of the bond (clean price) plus the accrued interest as full price . This full price is also called the dirty price of the bond.
  • Understanding Bond Pricing Interest last paid period Next payment period Day 1 Day 182 Seller sold on Day 40 Buyer must pay on Day 40 40/182 * [8/100 * 1000 * 0.5] = N8.79 to the seller in addition to the price of the bond Interest last paid period Next payment period Day 1 Day 182 Seller sold on Day 40 Buyer must pay on Day 40 40/182 * [8/100 * 1000 * 0.5] = N8.79 to the seller in addition to the price of the bond
  • Break! {10.30-11.00am}
    • Session 7: Practical Side to Fixed Income
    • Part B
    • Attractive Features of Bonds
      • Redemption (moratorium on redemption)
      • Tax Exempt Status
      • Tradability
      • Security on the back of ISPO
      • Bond Guarantee
      • Sinking Fund Provision
    • The Roles of Trustees in Bond Documentation & Transaction
    Training Course Outline
  • Analysis of GTB 100% Book-Building Issue Bond – [N200B Senior Unsecured Non-Convertible Debt Programme] Case Study – Analysis of Issued Bonds
  • Analysis of GTB 100% Book Building Process – Understanding Book Building Process Draft Prospectus registered with SEC Public Offering of Securities via book building Appointment of Book-runners Issue draft Prospectus (Red Herring) with required Disclosure – no fixed coupon rate and volume being sold Bidding Process Begins via syndicates Coupon price discovery begins via bidding process Bidding closes Issuer and Book runner (s) decides on volume and coupon Rate File Full Prospectus with SEC
  • Analysis of GTB 100% Book Building Process – Understanding Book Building Process 100% or less advance along with application 100% advance payment before allotment Payment Everyday as the book is built – ‘electronic book’ Only after closure of offer Demand Not Known but only price range Known in Advance Pricing Book Building Process Fixed Price Process Feature
  • Analysis of Cadbury Nigeria Plc N2.5Billion - [Unsecured Zero Coupon Irredeemable Loan Stock] Case Study – Analysis of Issued Bonds
  • Analysis of Cadbury Nigeria N5Billion - [Unsecured Zero Coupon Irredeemable Convertible Loan Stock (2005)] Case Study – Analysis of Issued Bonds
  • Analysis & Pricing of Lagos State Bond using MS Excel template Case Study – Analysis of Issued Bonds
  • Bonds Rating System & its Importance
    • Rating Agents:
    • Local (Nigeria)
      • Agusto & Co Limited, Nigeria
    • Popular Foreign Rating Agents
      • Fitch IBCA
      • Standard & Poor’s Corporation
      • Moody’s Investors Service
      • Duff & Phelps Credit Rating Company
    • Issues with Rating Agents
      • The issuer request to be rated
      • Payment for rating is made by the issuer
      • Usually carried out annually or
      • at the discretion of the rating company when a material change occur in the company.
    Bonds Rating System & its Importance
    • Some Rating Parameters
      • Leverage Ratio
      • Liquidity Ratio
      • Coverage Ratio
      • Profitability Ratio
      • Cash flow-to-debt ratio
    Bonds Rating System & its Importance
  • Analysis of Obudu Cattle Ranch Development Bond Case Study – Analysis of Issued Bonds
  • Analysis of Kwara State Fixed rate Bond Case Study – Analysis of Issued Bonds
  • Case Study – Analysis of Bonds in the Primary Market (FGN Bonds & Tbills)
  • Case Study – Analysis of Bonds in the Primary Market
  • Lunch! {2.00-3.00pm}
    • Session 8: Relevant Computations & Analysis in Bond
    • Repayment Sources of Bond
      • Internally Generated Revenue (IGR)
      • Statutory Allocation (via ISPO)
      • Self funding projects
    • Computing Coupon on Bonds
    • Computing Price of Callable & non-callable bonds
    • Bond Markets & Indices Computation
    • Marketing & Distribution of Bonds
      • Potential Buyers/Investors
      • Benefits & Potential Downsides of Investing in Bonds
    Training Course Outline
  • [Day 5]
    • Session 9: Basic Algebra and Financial Arithmetic
    • Part A: Understanding Financial Arithmetic Concepts & Principles
      • Simple Vs Compound Interest Rates
      • Frequency of Compounding
      • Future Value & Present Value of Assets
      • Exponentials and Natural logarithms
      • Manipulation of Exponential functions
      • Interest Conventions
      • Application of Discount Factors
      • Application of Differentiation Principles
      • Constructing a simple yield curve using discount prices
      • Geometric Progressions
      • Understanding Annuities
      • Basic Differentiation
    Training Course Outline
    • Session 9: Basic Algebra and Financial Arithmetic
    • Part B: Basic Financial Arithmetic in the Workplace
      • Understanding basis point
      • Understanding day basis in financial calculations
      • Understanding Present and Future Values
      • Using and Manipulations Date Functions
      • Depreciation Analysis & Computation
      • Basic financial statistics computations
      • Understanding Annuities and its Computations
      • Computing returns, discounted values and yields
      • Discounted Cash Flow Analysis: NPV and IRR
      • Calculating Net Present Value (NPV)
      • Calculating Internal Rate of Return (IRR)
    Training Course Outline
  • Lunch! {2.00-3.00pm}
    • Session 10: Understanding & Interpreting Financial Statements
      • Making sense of Company Financial Annual Reports
      • Corporate Financials (P&L, Balance Sheet, Cash flows & Value-added statements)
      • Interpreting Assets and Liabilities on the Balance Sheet
      • Interpreting Shareholders’ Equity on the Balance Sheet
      • Analysing the Income Statement
      • Statement of Cash flows and Classification
      • Basic Financial Ratios and Interpretations
      • Du Pont Analysis Using P&L and Balance Sheet
    Training Course Outline
    • Associated Softcopies Files:
    • Presented Copy Soft in MS Powerpoint
    • Financial Statement – MS Excel
    • Financial Analysis Worksheets – MS Excel
    • Unilever Plc Balance Sheet – MS Excel
    • Unilever Plc Profit & Loss Statement – MS Excel
    • Unilever Plc Cash Flow Statement – MS Excel
    • Section 1: List individuals and entities with an interest in a company's financial statements.
    • Investors (owner)
    • Potential Investors
    • Creditors
    • Government
    • Analysts
    • Others
    • Section 1: Transaction Analysis Model
    • Process of analysing a transaction to determine its economic effect on the entity in terms of the accounting equation
    • Model of Analysis
      • Basic accounting equation
      • Duality of effect (at least two accounts affected and also two directions of the effects)
    • The accounting equation must remain in balance after each transaction
    • Note: Financial Agreement may not result in transaction from an accounting point of view.
    • Section 1: Recording Transactions
    • Any effect that has economic impact on an entity – could be internal or external.
    • Exchange of promises not included.
    • Accounts are used to capture the effect of transactions.
    • Accounts are kept in the form of Chart of Accounts.
    • Section 1: Introduction
    • Understanding the financial health of a company is fundamental to decision making by external parties.
    • Business intelligence applications within the Financial Analysis application area include:
    Budgeting and Budget Analysis Accounts Payable Analysis Financial Performance Management Accounts Receivable Analysis Invoicing and Billing Analysis Expense Analysis Cash Flow Analysis Cost Analysis Balance Sheet Analysis Revenue Analysis Profit and Loss Statements
    • Section 1: Auditors/Independent Accountant Role
    • Is the Accounting Principle appropriate?
    • Are estimates reasonable?
    • A check of company’s accounting and internal control system
    • Confirmation of assets and liabilities
    • No material errors in the financial statement
    • Use of Generally Accepted Auditing Standards (GAAS)
    • Note: A GAAP-based financial Statement will be followed by an Auditor’s report with 3 claims
    • Section 1: Four Basic financial Statements for external decision makers:
    • Balance Sheet
    • Income Statement
    • Cashflow Statement
    • Retained Earnings Statement
    • Section 1: Types of Notes/Footnotes
    • Provides supplemental information about the financial condition of a company to fully understand it.
      • Description of the accounting rules applied in the company’s statements
      • Provision of additional detail about a line on the financial statements
      • Additional financial disclosures about items not listed on the statements themselves
    • Section 1: Footnotes (Principal Parts)
    • Information about accounting methods, assumptions and estimates
    • Supplementary disclosures
    • Section 1: Financial Statement – An Introduction
    • A company asset must have a financing source –
      • Via owners’ equity
      • Liabilities/creditors
    • Hence, at any point, total assets must be equal to the combined owners’ equity and liabilities.
    • Assets (A) = Liabilities (L) + Equity (E)
    • Economic Resources (E) = Sources of Funding the resources (Liabilities + Equities)
    • Section 1: Financial Statement – An Introduction
    • Assets (A) = Liabilities (L) + Equity (E)
    • Economic Resources (E) = Sources of Funding the resources (Liabilities + Equities)
    • Liabilities – obligations resulting from past transactions
    • Purchase of goods (or services) on credit and through cash borrowings to finance the entity (creating accounts payable and notes payable ).
  • Income Statement = cash flow statement + balance sheet
    • Section 1: Financial Statement – Balance Sheet
    • Assets & Liabilities
    • Assets
      • Economic resources owned by the entity and used to generate income.
      • Every asset is initially measured on the balance sheet by the total cost incurred to acquired it (original acquisition cost (cost principle)).
      • Assets are economic resources available to operate the business
      • Assets could also be sold to generate cash
    • Liabilities
      • Resources belonging to others entities used (in addition to Assets) to generate income.
      • A form of financing provided by creditor/other entities
    • Section 1: Financial Statement – Balance Sheet
    • Assets & Liabilities
    • Assets & liabilities are classified according to:
      • their liquidity,
      • their expected use in operations or conversion to cash
      • And time-to-maturity
    • Section 1: Financial Statement – Balance Sheet
    • Fixed Assets – are reported on Book Value Basis i.e.
    • Original Value of acquisition less the amounts used up in past operations.
    • Section 1: Financial Statement – Balance Sheet
    • Assets & Liabilities
    • Assets are usually listed on the balance sheet in order of liquidity or ease of conversion to cash.
    • The most liquid asset coming first
    • Liabilities are usually listed in order of maturity from quickest to long-term.
    • Section 1: Financial Statement – Balance Sheet
    • Assets & Liabilities
    • Assets expected to be converted to cash or used within one year (or operating cycle, if longer than one year) are classified as current assets
    • Obligations the firm expects to settle within one year or one operating cycle, if longer) are classified as current liabilities
    • Assets expected to provide benefits and services over periods exceeding one year are classified as long-term asset
    • Liabilities to be repaid after one year are classified as long-term liabilities
    • Section 1: Financial Statement – Statement of Stockholders’ Equity
    • Equity – Financing provided by owners of the business and earnings retained in the business (not distributed to owners).
    • Statement of Stockholders’ Equity ( also called Net worth ) .
      • Preferred Shares
      • Common shares (@ par/stated value)
      • Additional paid-in capital (premium capital)
      • Retained earnings
      • Financing provided by owners creates owners’ equity in the form of common shares.
    • Section 1: Issues with Financial Statements
    • Retailed Earnings Statement
      • Earnings of net income in the current year increases the balance of the retained earnings.
      • A vital link between the balance sheet and income statement.
      • Re-investment of earnings grow the business (assets and business worth).
    Ending Retained Earnings = Beginning Retained Earnings + Net Income - Dividend
  • Analysis of Shareholders’ Equity Contributed Capital (by Owners) Common shares (@ par/stated value) Additional paid-in capital (premium capital) par/stated value)
    • Section 1: Guide to Forecasting
    • Extra-ordinary Items
      • transactions and events that are:
        • unusual in nature and
        • infrequent in occurrence
        • and are material in amount
        • Report separately net of income
    • Section 1: Operating Cycle of Business
    • Turning cash-to-cash:
    • Revenue leads to either:
      • Cash
      • Receivable
    • Analysis of Chart of Accounts
    • (Financial Statement Templates)
  • Section 1: A Look at Profit & Loss Account
  • Section 1: A Look at a Balance Sheet
  • Detailed Analysis of a Balance Sheet (MS Excel Template)
  • Income Statement
    • What you must know:
    • Revenue = Turnover/Sales
    • Income = Profit = net income = bottom line
    • Cost = Expenses
    • Different between Expense and Expenditure
    • Revenue/turnover/sales is normally reported in the period in which goods and services are sold NOT when cash is collected!
    • Expense = amount of resources used up to earn the revenue.
  • Detailed Analysis of a Profit & Loss Statement (MS Excel Template)
  • Analysis of Transaction Model Assets Liabilities Equity + - Dr Cr - + - + Dr Cr Dr Cr + Increase (+) in Assets result in Account Debit Increase (+) in (Liabilities + Equity) result in Account Credit
  • [Reading Annual Reports]
  • [Notes to Financial Accounts]
    • Section 4: Statement of Cash flow Model
    • Income Statement does not provide any information concerning cash flows, accountants therefore prepare the statement of Cash flow to report inflows and outflows of cash.
    • A key statement to determine if debtors can pay back loans.
    • Section 4: Statement of Cash flow Model
    • The Statement of Cash flow divides all activities/categories that affect cash into three –
    • Operating,
    • Investing and
    • financing activities.
    • Section 4: Issues with Financial Statements
    • Cashflow Statement
      • Increasing Operating Cost
      • Increasing investment in Assets and expansion
      • Increasing financing cost
      • Change in the company cash position = change in operating cost + change in Investing Activities + change in Financing Cost
      • Change can be positive or negative !
    • Section 4: Statement of Cash flow Model
    • Cash flow Analysis – You need to know which item belongs to which category of cash flow activities in order to understand drawing up cash flow statement.
    • Cash paid to –ve
    • Cash received from +ve
    • Section 4: Statement of Cash flow Model
    • Cash flow Analysis – Classify the following:
      • Monthly payment of bank interest
      • Cash purchase of furniture
      • Cash payment of annual dividend
      • Interest on purchase of FGN bonds
      • Payment of workers salaries
      • Lump-sum Settlement of retirees
      • Disposal of company unserviceable cars
      • Payment of tax to government
      • Donations to charity
    • Section 4: Statement of Cash flow Model
    • Cash flow Analysis
    • Creditor, the cash from Operations is the most important. The only cash available to pay dividend in the long-run.
    • Section 4: Operating and Non-Operating Events
    • Financial Instruments Issues
    • Unrealized gains and losses
    • Cashflow – Statement of cash receipts and payments in the period of occurrence
    • Operating
    • Investing
    • Financing
    • Cashflow Statement – Financing
      • Issuance or retirement of debt and equity securities
      • Payment of dividend
    • Section 4: Operating and Non-Operating Events
    • Cashflow Statement – Investing
      • Buying and selling of non-current assets and investments
      • Acquisition/sale of properties, plants and equipment
      • Acquisition/sale of subsidiary/segment
      • Purchase/sale of investment in other firms
    • Section 4: Operating and Non-Operating Events
    • Cashflow Statement – Financing
      • Issuance or retirement of debt and equity securities
      • Payment of dividend
    • Note: Only when cash is involved do we include these activities on the statement of cash flow. When cash is not involved in a transaction, no effect on the cash flow.
    • Section 4: F inancial Statement link
    • Most users tend to look at each of the financial statements in turn.
    • All the three key financial statements are linked.
      • The income statement shows the potential cash flows.
      • The cash flow statement shows the real cash flows.
      • The balance sheet shows the cash owing or payable .
    • Section 4: Issues with Financial Statements
    • Balance Sheet
      • Overstating economic resources it owned
      • Understating its obligations to others
    • Income Statement
      • Overstating its ability to sell goods for more than the cost to produce it.
    • Cashflow Statement
      • Overstating its ability to generate cash from sales and its ability to meet its debts obligation
    • Retailed Earnings Statement
    • Section 4: Issues with Financial Statements
    • Cashflow Statement
      • Overstating its ability to generate cash from sales and its ability to meet its debts obligation
      • Why Cashflow Statement?
        • Reported revenue do not always equal cash collected from customers/clients
        • Reported expenses not always equal to the cash paid out in the period under consideration.
        • Hence, net income not always equal to cash in the bank!
  • Profit not= Solvency! Cash is King!
  • Detailed Analysis of a Cashflow Statement (MS Excel Template)
    • When fair value can be questionable:
      • A large block of stock that represents a controlling interest in a company will have a fair value larger than the product of the number of shares and the market price per share
      • Hence, a controlling interest to have a value that is separate from the value of the individual shares traded in the market
      • The value of a core investor’s holding in a company is always higher than the value generated from the unit market price applied to the unit holding.
    Background to Valuation: The Concept of Fair Value
    • When a market price exists that cannot be used directly as a fair value, it can still provides some guidance as to the value of an instrument
    • Such market price helps to provide guidance or estimate to the fair value.
    • We can use the market value of similar instruments, with adjusts, as an estimate for the price of another securities.
    • When market value is not available (or does not represent fair value), fair value can be computed as a present value of future cash flows of such securities.
    Background to Valuation: The concept of Fair Value
    • The present value approach is a reasonable approximation of market value of securities. This is particularly true for financial instruments, where it is generally possible to estimate the future cash flows associated with such instrument.
    • The present value model provides flexible
    • It can be adapted to reflect the value of risk and uncertainty .
    • This is important because many financial instruments involve cash flows that are uncertain .
    Background to Valuation: The concept of Fair Value
  • Valuation Models using Discounted Cash Flow Analysis
    • Discounted Cash Flow Analysis
    • Free Cash Flow to Firm
    • Free Cash Flow to Equity
    • Principles of financial analysis using NPV, IRR
    • Relative Valuation
    • Hybrid of DCF and relative valuation
    • Conducting reality check on results
  • Free Cash Flow- An Introduction
    • The free cash flows are defined as entity (or enterprise) cash flows, and as we shall see, they include pre-financing operating cash flows (from both the income statement and the balance sheet)
    • Free cash flows are available for payment to providers of capital – debt and equity
    • These free cash flows are discounted at a weighted average of the marginal after-tax opportunity costs of sources of capital – debt and equity
    • This called the weighted average cost of capital .
  • Background to Valuation – Financial Services Firms
    • For financial service firms, it is difficult to estimate free cash flows
    • When you cannot estimate the free cash flows to equity or the firm, the only cash flow that you can discount is dividends.
    • If a firm’s debt ratio is not expected to change over time, the free cash flows to equity can be discounted to yield the value of equity
    • If a firm’s debt ratio might change over time, free cash flows to equity become cumbersome to estimate. Here, we would discount free cash flows to the firm
    • Choosing a Cash Flow to Discount
  • E stimating Equity Value — Equity & Entity Approaches
    • There are two ways of estimating the value of shareholders’ wealth.
    • The entity approach estimates the equity value by starting with the entity value, V (by discounting after-tax operating cash flows at the weighted average cost of capital), then subtracting the market value of debt.
    • The equity approach discounts free cash flows to shareholders at the cost of equity.
  • The value of the firm is obtained by discounting expected cashflows to the firm, i.e., the residual cashflows after meeting all operating expenses and taxes, but prior to debt payments, at the weighted average cost of capital, which is the cost of the different components of financing used by the firm, weighted by their market value proportions. where, CF to Firm t = Expected Cashflow to Firm in period t WACC = Weighted Average Cost of Capital Value of Firm = CF to Firm t (1+WACC)t where t=1 to t=n Cash flows Firm : Pre-debt cash flow Equity : After debt cash flows Understanding Firm Valuation
  • Firm and Equity Valuation - Differences
    • Expected Growth Firm: Growth in Operating Earnings Equity: Growth in Net Income/EPS
    • Applicable Discount Rates Firm: (weighted) Cost of Capital Equity: Cost of Equity
    • Value Firm: Value of Firm Equity: Value of Equity
  • Estimating Inputs in Valuation Models
    • Discount Rates
      • Important in discounted cash flow valuation
      • Errors in estimating the discount rate or mismatching cashflows and discount rates will result in valuation error.
      • The discount rate used should be consistent with both the riskiness and the type of cashflow being discounted.
    • Note: The cost of equity is the rate at which we discount cash flows to equity (dividends or free cash flows to equity).
    • The cost of capital is the rate at which we discount free cash flows to the firm.
  • Illustrating Cost of Equity and Firm Capital - Example
    • Computing Cost of Firm Capital:
    • Equity: Cost of Equity = Riskfree rate + Beta * Risk Premium
    • = 4% + 1.25 (4.82%) = 10.00% Assuming a listed company with trading price,
      • Value of Equity (market capitalization) = N55.101 Billion
      • Equity/(Debt +Equity ) = 79%
    • Debt: After-tax Cost of debt =(Riskfree rate + Default Spread) (1-t)
    • t = corporate tax-rate = 37.30% after-tax cost of debt = (4%+1.25%)*(1-.373) = 3.29%
    • • Market Value of Debt = N14.668 Billion • Debt/(Debt +Equity) = 21%
    • Cost of Capital = 10.00%(.79)+3.29%(.21) = 8.59%
  • Estimating Equity Value — Equity & Entity Approaches In the example that follows, the NPV of a project is estimated both ways to show that although they provide equivalent values, the entity approach is more practical. V = Entity Value B = Market Value of Debt S = Market Value of Equity FCF = operating free cash flows  N t = 1 E(FCF t ) (1 + WACC) t V =  N t = 1 E(Cash to Debt t ) (1 + K b ) t B =  N t = 1 E(Cash to Shares t ) (1 + K s ) t S =
  • Pro-forma income statement (income model) 6.0 Profit after taxes -1.9 Taxes 7.9 Profit before taxes -12.2 Total costs -2.2 Provisions -10.0 Operating costs 20.1 Net income before costs 6.6 Commission and fee income 13.5 Net interest income -12.9 Interest expense 26.5 Interest income
  • Pro-forma equity cash flow 3.0 Free cash flow to equity -40.0 increases in loans to customers -20.0 increases in due from other banks -10.0 increases in marketable securities -8.0 increases in cash and reserves Plus uses of funds 10.0 increases in debt -- increases in due to other banks 65.0 increases in customer deposits Plus sources of funds -- plus Non-cash items (depr. and amort.) 6.0 Profit after taxes
  • Determining Cost of Capital
    • Debt is a senior obligation of the company.
        • Short-term debt is due within one year
        • Secured debt is collateralized by an asset
        • Zero coupon debt pays no interest as coupons
        • Callable debt may be repaid before its maturity date by paying a call premium in addition to the face value
        • Convertible debt may be exchanged for equity at a predetermined ratio at the option of the debt holder
        • Debt ratings are measures of credit risk provided by rating agencies (S&P and Moody’s)
        • Subordinated debt has lower priority in the event of bankruptcy, and therefore a lower credit rating
      • Equity is the residual claim on the firm’s cash flows
          • Cash flows to equity are delivered in the form of
            • Dividends
            • Share repurchases (results in capital gain and capital gain tax)
            • Spinoffs (not taxable)
          • The remaining cash flows to equity are retained in the firm
          • Dividends paid are not tax deductible to the company
  • The Weighted Average Cost of Capital
    • WACC is the after-tax marginal opportunity cost of funds to the company. Therefore, it is based on the current costs of various sources of funds – debt, and equity – not on historical cost. Also, the weights of fund sources are current market value weights, not book values.
    Where the following definitions apply: K b = The before tax cost of bonds with the same duration and credit risk as (ten year) debt of the company T = The marginal statutory tax rate of the company B = The current market value of bonds (in the firm’s target capital structure) V = The current market value of the company (V = B+P+S) K s = The current market cost of equity S = The current market value of equity (in the firm’s target capital structure)
  • The Opportunity Cost of Equity – CAPM
    • There are two problems applying this approach:
        • It is hard to estimate g because it is the long term expected growth in dividends
        • If g increase then K s does not necessarily increase because the stock price, S, goes up when g does
    • The Capital Asset Pricing Model is the most widely used approach for estimating the cost of equity.
    E (R j ) = K s = R f + E (R m ) - R f  j Cost of Equity Risk Free Rate Market Risk Premium Systematic risk (Beta) 3. E (R j ) E (R m ) R f  m = 1 Systematic Risk
  • The Opportunity Cost of Equity – Calculating Beta
    • A simple linear regression of the returns on the i m security against the returns on the market portfolio serves to illustrate.
    R it = a + b R mt + e it b i = COV (R it , R mt ) VAR (R mt ) =  eta i
    • There are two important results:
        • The error terms are randomly distributed around the regression line and are independent of the market return, R m . Therefore, they are diversifiable across securities.
        • The slope of the line is  eta. It measures the sensitivity of the return on the i th security to the market portfolio
  • The Opportunity Cost of Equity – APM
    • The Arbitrage Pricing Model can be thought of as a multifactor generalization of the CAPM. All systematic risk in the CAPM is found in the relationship between a security and the market portfolio. The arbitrage pricing model (APM) allows multiple sources of systematic risk. Its model is:
    K s = E (R i ) = R f + [E (F 1 ) - R f ]  eta 1 + [E (F 2 ) - R f ]  eta 2 + . . . + [E (F k ) - R f ]  eta k
    • Empirical work has suggested 5 factors
        • Industrial production index: a measure of how well the economy is doing in terms of actual physical output
        • Short-term real rate: measured by the difference between the yield on (short-term) T-bills And the Consumer Price Index
        • Short-term inflation: measured by unexpected changes in the Consumer Price Index
        • Long-term inflation: measured as the difference between the yield to maturity on long- and short-term U.S. government bonds
        • Default risk: measured by the difference between the yield to maturity on Aaa versus Baa-rated long-term corporate bonds
  • Calculation of Free Cash Flow
    • Continuing Value
    * Assumes long-term growth equals 5%, i.e. $90 / (.10 - .05) = $1,800 Infinity Entity Value Discount FCF at WACC 10% Infinity The continuing value formula discounts cash flows beyond the explicit forecast period back to the present by making (somewhat crude) assumptions about the growth in cash flows and the return on invested capital in the long run. Discount at WACC 10% Continuing Value*
  • Continuing Value Formula CV = The continuing value formula is the same as the formula for an infinite growing annuity: FCF T+1 WACC - g CV = NOPLAT T+1 (1 - g/r) WACC - g
    • Section 6: Steps to Ratio Analysis
    • K now the decision question that the ratio address
    • 2. E xamine the ratio using two (2) techniques
      • Comparison over time
      • Comparison with the competition
    • 3. Y ou interpret the result carefully
  • Section 6: Steps to Ratio Analysis Liquidity Analysis Ratios        Current Ratio    Current Assets  Current Ratio = ------------------------   Current Liabilities     Quick Ratio    Quick Assets  Quick Ratio = ----------------------   Current Liabilities    Quick Assets = Current Assets - Inventories
  • Section 6: Steps to Ratio Analysis Net Working Capital Ratio      Net Working Capital Net Working Capital Ratio = --------------------------   Total Assets    Net Working Capital = Current Assets - Current Liabilities
  • Section 6: Steps to Ratio Analysis Activity Analysis Ratios     Assets Turnover Ratio    Sales   Assets Turnover Ratio = ----------------------------   Average Total Assets     Average Total Assets = (Beginning Total Assets + Ending Total Assets) / 2   
  • Section 6: Steps to Ratio Analysis Accounts Receivable Turnover Ratio    Sales   Accounts Receivable Turnover Ratio =-----------------------------------   Average Accounts Receivable     Average Accounts Receivable  = (Beginning Accounts Receivable + Ending Accounts Receivable) / 2    
  • Section 6: Steps to Ratio Analysis Inventory Turnover Ratio    Cost of Goods Sold   Inventory Turnover Ratio =---------------------------   Average Inventories     Average Inventories = (Beginning Inventories + Ending Inventories) / 2     
  • Section 6: Steps to Ratio Analysis Capital Structure Analysis Ratios    Debt to Equity Ratio    Total Liabilities   Debt to Equity Ratio = ----------------------------------   Total Stockholders' Equity          Interest Coverage Ratio    Income Before Interest and Income Tax Expenses   Interest Coverage Ratio =-------------------------------------------------------   Interest Expense     Income Before Interest and Income Tax Expenses  = Income Before Income Taxes + Interest Expense   
  • Section 6: Steps to Ratio Analysis Capital Market Analysis Ratios     Price Earnings (PE) Ratio    Market Price of Common Stock Per Share  Price Earnings Ratio =------------------------------------------------------   Earnings Per Share         Market to Book Ratio    Market Price of Common Stock Per Share  Market to Book Ratio =-------------------------------------------------------   Book Value of Equity Per Common Share    Book Value of Equity Per Common Share  = Book Value of Equity for Common Stock / Number of Common Shares    
  • Section 6: Steps to Ratio Analysis Capital Market Analysis Ratios       Dividend Yield    Annual Dividends Per Common Share  Dividend Yield =------------------------------------------------   Market Price of Common Stock Per Share    Book Value of Equity Per Common Share  = Book Value of Equity for Common Stock / Number of Common Shares     Dividend Payout Ratio    Cash Dividends Dividend Payout Ratio =--------------------   Net Income   
  • Section 6: Steps to Ratio Analysis   Return On Asset     ROA = Profit Margin X Assets Turnover Ratio    Net Income Net Income Sales  ROA =------------------------  = --------------  X ------------------------   Average Total Assets  Sales Average Total Assets      Profit Margin = Net Income / Sales  Assets Turnover Ratio = Sales / Averages Total Assets  
  • Section 6: Steps to Ratio Analysis   Return On Asset     ROA = Profit Margin X Assets Turnover Ratio    Net Income Net Income Sales  ROA =------------------------  = --------------  X ------------------------   Average Total Assets  Sales Average Total Assets      Profit Margin = Net Income / Sales  Assets Turnover Ratio = Sales / Averages Total Assets  
  • Section 7: Steps to Ratio Analysis Profitability Analysis Ratios    Return on Assets (ROA)    Net Income   Return on Assets (ROA) = ------------------------------   Average Total Assets     Average Total Assets = (Beginning Total Assets + Ending Total Assets) / 2    Return on Equity (ROE)    Net Income   Return on Equity (ROE) = ---------------------------------------  Average Stockholders' Equity     Average Stockholders' Equity  = (Beginning Stockholders' Equity + Ending Stockholders' Equity) / 2     
  • Section 7: Steps to Ratio Analysis   Profit Margin    Net Income   Profit Margin = -----------------   Sales          Earnings Per Share (EPS)    Net Income   Earnings Per Share = -----------------   Number of Common Shares Outstanding       
    • Methods Used For Financial Analysis
    • percentage analysis - involves reducing a series of figures as a percentage of some base amount. A group of items can be expressed as a percentage of net income.
    • Horizontal analysis (When proportionate changes in the same figure over a given time period expressed as a percentage.)
    • Vertical or common-size analysis (reduces all items on a statement to a “common size” as a percentage of some base value which assists in comparability with other companies of different sizes).
    • all Income Statement items are divided by Sales, and all Balance Sheet items are divided by Total Assets.
  • Methods Used For Financial Analysis Another method is comparative analysis . This provides a better way to determine trends. Comparative analysis presents the same information for two or more time periods and is presented side-by-side to allow for easy analysis.
  • Methods Used For Financial Analysis Another method is comparative analysis . This provides a better way to determine trends. Comparative analysis presents the same information for two or more time periods and is presented side-by-side to allow for easy analysis.
  • Thank you
  • Good luck!