Day 1 – CFA Ethics: This study session present a framework for ethical conduct in the investment profession by focusing on the CFA Institute Code of Ethics and Standards of Professional Conduct as well as the Global Investment Performance Standards (GIPS®).

Day 2 – CFA Quantitative Methods: This introductory study session presents the fundamentals of some quantitative techniques essential in financial analysis. These techniques are used throughout the CFA Program curriculum. This session introduces two main tools of quantitative analysis: the time value of money and probability and descriptive statistics.

Day 3 – CFA Economics: This study session focuses on the microeconomic principles used to describe the marketplace behavior of consumers and firms. The first reading explains the concepts and tools of demand and supply analysis—the study of how buyers and sellers interact to determine transaction prices and quantities.

Day 4 – CFA Financial Reporting and Analysis: The readings in this study session discuss the general principles of the financial reporting system, underscoring the critical role of the analysis of financial reports in investment decision making.

Day 5 – CFA Corporate Finance: This study session covers the principles that corporations use to make their investing and financing decisions. Capital budgeting is the process of making decisions about which long-term projects the corporation should accept for investment and which it should reject. Both the expected return of a project and the financing cost should be taken into account.

Day 6 – CFA Portfolio Management: This study session provides the critical framework and context for subsequent Level I study sessions covering equities, fixed income, derivatives, and alternative investments. Furthermore, this study session also provides a basis for the coverage of portfolio management at Levels II and III.

Day 7 – CFA Equity: This study session explains important characteristics of the markets in which equities, fixed-income instruments, derivatives, and alternative investments trade. The reading on market organization and structure describes market classifications, types of assets and market participants, and how assets are traded.

Day 8 – CFA Fixed Income: This study session presents the fundamentals of fixed-income investments, one of the largest segments of global financial markets. The first two readings introduce the basic features and characteristics of fixed-income securities and their associated risks. The third reading describes the primary issuers, sectors, and types of bonds. The final reading of the study session introduces yields and spreads and the effect of monetary policy on financial markets.

Day 9 – CFA Derivatives: Derivatives financial instruments that derive their value from the value of some underlying asset i have become increasingly important and fundamental in effectively managing financial risk and creating synthetic exposures to asset classes. As in other security markets, arbitrage and market efficiency play a critical role in establishing prices.

Day 10 – CFA Alternative Investments: Investors are increasingly turning to alternative investments seeking diversification benefits and higher returns. This study session describes the common types of alternative investments, their valuation, their unique risks and opportunities, and their relation to traditional investments.

I hope all of you benefit greatly from this free CFA Course and we would like to know your feedback on how to improve the same.

All the best for your CFA Preps!

]]> http://www.edupristine.com/blog/free-cfa-course/feed/ 0 http://www.edupristine.com/blog/financial-modeling-round-up/?utm_source=rss&utm_medium=rss&utm_campaign=financial-modeling-round-up http://www.edupristine.com/blog/financial-modeling-round-up/#comments Fri, 27 Jan 2012 15:01:52 +0000 Prasad http://www.edupristine.com/?p=11536 We have finally completed our financial model on the Chocolate business, and here are the steps. I am concluding this Financial Modeling series in one summary post.

1. The first thing you do in creating your Financial Model, is to create an Income Statement (also known as a Profit and Loss statement)
2. You will need to move on to the Interest Schedule and the Debt Schedule in order to complete your P&L
3. With your P&L in place, you move on to the Balance Sheet
4. You can then create the Cash Flow Statement as well. Once this is done, you loop it back to finish your Balance Sheet
5. Then to test your Financial Model and also to check how your numbers are doing as compared to the industry, you put together the Financial Ratios
6. The next step is to break down your Return on Equity using the DuPont Analysis
7. Lastly, to check how long your business model can sustain without any further infusion of funds, you check the Sustainable Growth Rate (SGR)

Well, it was interesting to discuss how to create this sweet model for a Chocolate manufacturing business. I sure had fun creating and discussing this model with you! You can download the complete model here.

At this point, I would also like to point out that the complexity of a model also depends on how many factors you are willing to consider, how many plans are you willing to drill-down to and most importantly how realistic are you about the business.

Team Pristine celebrates the Republic Day with the rest of India. Students, please bear with us we will not be as prompt with our responses!

Today also happens to be Ganesh Jayanti,  which is the birthday of Lord Ganpati. Ganesh happens to be our favorite god not only because of his appetite for sweets, but also because he is the god of Vidya (knowledge).

The Debt Capital Markets division of ING Vysya Bank Ltd are looking for bright candidates to join their DCM desk as  Interns/ Industrial Trainees. 

Requirements

• Strong academic record
• Self Driven with good interpersonal and communication skills
• Flair for credit appraisal and analysis of  Financial Statements
• Well versed with MS Office 
• Preferably with some background in dealing with Banks (eg. Bank Audit)

Candidate will be expected to assist in preparation of Pitchbooks, Information Memorandum, Financial Models, Credit proposals of banks in the Loan Syndication Business of DCM.
 
Debt Capital Markets desk of ING in India primarily  deals with Banks/  Financial Institutions for arranging term loans, working capital, foreign currency borrowings, corporate loans, project finance and structured debt to meet the funding needs of a variety of Corporates across India.
 
ING Vysya Bank Ltd, is an entity formed with the coming together of erstwhile, Vysya Bank Ltd, a premier bank in the Indian Private Sector and a global financial powerhouse, ING of Dutch origin, during Oct 2002. Our bank has 527 branches with business mix of over Rs. 58,000 crores.

How to Apply

To apply for this instructions, please download this PDF for instructions and contact the address mentioned in the document.

Continuing with our chocolate business example:

Suppose your chocolate business is 2 year old and experiencing a good acceptance in the market. Now you as the owner of the business are concerned about the growth rate that can be sustained without borrowing external funds.

With this thought in mind, you call your accountant and ask him about the measure that can solve your concern. Your accountant explained you that given the retained earnings as a %age of net income and net income as a %age of equity, we can calculate the sustainable growth rate (SGR) as the function of retention rate and ROE, which shows how much growth a company can potentially generate internally given its level of profitability.

Sustainable Growth Rate (SGR) = Retention Rate (RR) * Return on Equity (ROE)

ROE can be calculated using DuPont analysis.

Procedure for calculating Sustainable Growth Rate (SGR)

Step 1: Calculate the Retention Ratio (RR)

Step 2: Calculated the ROE

ROE numbers are taken from DuPont analysis done in the previous exercise.

Step 3: Finally multiply the two ratios calculated above to get the SGR

SGR Templates to download

I have created a SGR template for you, where the subheadings are given and you have to link the model to get the cash numbers! You can download the same from here. You can go through the case and fill in the yellow boxes. I also recommend that you try to create this structure on your own (so that you get a hang of what information is to be recorded).

Also you can download this filled template and check, if the information you recorded, matches mine or not!

Suppose you are going through the financial ratios of our company and stop at ROE and wondering what are the factors that are contributing or impacting the ROE. You called your accountant and asked him to find the means through which factors impacting ROE can be tracked. Considering your concern, the accountant is explaining you the two variants of DuPont Analysis.

1. The three part approach
2. The extended five part approach

Original Formula for ROE

Now multiply (Revenue/Revenue) with the above mentioned formula and re-arrange the terms

Now multiply (Total Assets/Total Assets) and re-arrange the terms

If we further breaks down the Net Profit Margin, it becomes the extended five part DuPont equation.

Therefore the extended DuPont equation is

Procedure for three-part Approach

Step 1: Calculate the Net Profit Margin

Step 2: Calculate the Asset Turnover Ratio

Step 3: Calculate the Financial Leverage

Step 4: Finally multiply all the three ratios to calculate the ROE

Procedure for five-part Approach

Step 1: Calculate the Tax Burden

Step 2: Calculate the Interest Burden

Step 3: Calculate the EBIT Margin

Step 4: Calculate the Asset Turnover Ratio

Step 5: Calculate the Financial Leverage

Step 6: Finally multiply the entire above calculated ratio together to get the ROE

Dupont Analysis Templates to download

I have created a Dupont Analysis template for you, where the subheadings are given and you have to link the model to get the cash numbers! You can download the same from here. You can go through the case and fill in the yellow boxes. I also recommend that you try to create this structure on your own (so that you get a hang of what information is to be recorded).

Also you can download this filled template and check, if the information you recorded, matches mine or not!

• Way of showing unorganized data e.g. to show results of an election, income of people for a certain region, sales of a product within a certain period, student loan amounts of graduates, etc.
• Two major means of summarizing a set of numbers: pictures and summary numbers
• Frequency distributions can be used for both qualitative and quantitative data
• Each entry in the table contains the frequency or count of the occurrences of values within that particular group or interval

Simple Case Study

Thomas obtained the following marks in his 10 Statistics tests during the semester:

24, 26, 18, 21, 27, 27, 30, 44, 32, 38

How can you draw any inference from here?

First step is to summarize and see what the data has to say.

So how would you organize, classify this data, form the table and present it in the form of a picture? Simplest is to put it in a tabular form (Frequency Distribution):

Class	Frequency
15 – 25	3
25 – 35	5
35 – 45	2

Here the total number of classes is 3. And we can clearly see that most of the marks secured in the mid range. Small number of times very low and very high marks are secured.

So how do you draw the frequency distribution table?

• Find the range of the data: The range is the difference between the largest and the smallest values. In our example it is 44-18=26
• Decide the approximate number of classes: Which the data are to be grouped. In the case of Thomas, the data size was small so only 3 intervals were selected.
• Determine the approximate class interval size: The size of class interval is obtained by dividing the range of data by number of classes. In case of fractional results, the next higher whole number is taken as the size of the class interval.
• Decide the starting point: The lower class limits or class boundary should cover the smallest value in the raw data.
• Determine the remaining class limits (boundary): When the lowest class boundary of the lowest class has been decided, then by adding the class interval size to the lower class boundary, compute the upper class boundary. The remaining lower and upper class limits may be determined by adding the class interval size repeatedly till the largest value of the data is observed in the class.
• Distribute the data into respective classes: All the observations are marked into respective classes by using Tally Bars (Tally Marks) methods which is suitable for tabulating the observations into respective classes.

Important Points to note

• There is not right or wrong way for creating the distribution table – the only point that should be noted is that the class size should be consistent.
• Relatively uniform in terms of frequency distribution. it should not happen that all the 10 data point get in one interval and the frequency for the rest of the classes is 0.

Frequency Distribution Presentation – Histogram and Frequency Polygon

• A histogram - graphical equivalent of a frequency distribution; it is a bar chart where continuous data on a random variable’s observations have been grouped into intervals
• A frequency polygon- is the line graph equivalent of a frequency distribution; it is a line graph that joins the frequency for each interval, plotted at the midpoint of that interval.

In our case study,

• If a histogram is drawn then it would be 3, 5 and 2.
• Count frequencies of a particular class and if the mid points are joined this will be called a frequency polygon for frequency distribution.

Presenting Histogram of the Data

Data of Thomas can be shown in the form of a histogram:

Presenting Frequency polygon

Midpoints of the interval of corresponding rectangle in a histogram are joined together by straight lines. It gives a polygon i.e. a figure with many angles. Unlike histograms, frequency polygons can be superimposed so as to compare several frequency distributions. For the marks obtained by Thomas we can have the frequency polygon as shown below:

Managing and operating on frequency tabulated data is much simpler than operation on raw data. There are simple algorithms to calculate median, mean, standard deviation etc. from these tables as well.

CFA is the gold standard in education and lays a strong foundation on Quantitative Analysis and understanding the principles of data distribution. If you are interested in gaining a fundamental stronghold on your finances, you can consider enrolling for the CFA Examination. More details about the examination can be obtained by sending an email to info@edupristine.com or calling +91 989 298 0608.

Ratios are a tool for expressing the relationship between various accounting data that can be used for both internal and external comparisons. Financial Ratio analysis as a whole is used for evaluating the financial condition and performance of a business.

Continuing with our example:

Suppose your chocolate business is now two years old, and you want to compare your organizations performance with the competitors and also your past performance with the current years. So you called your accountant and asked him the way to do so.

Your accountant suggests to you the ratio analysis and also narrates its advantages and disadvantages of it.

Advantages of Financial Ratio Analysis

1. Helpful for forecasting the future earnings and cash flows.

2. Helpful in comparative analysis.

3. It helps in evaluating the financial position and operating efficiency of a business.

Disadvantages of Financial Ratio Analysis

1. Financial Ratios are only meaningful when compared to the historical performance or externally to other firms.

2. Different firm follows different accounting principles which make comparisons among firm meaningless.

Financial Ratios Templates to download

I have created a Financial Ratios template for you, where the subheadings are given and you have to link the model to get the cash numbers! You can download the same from here. You can go through the case and fill in the yellow boxes. I also recommend that you try to create this structure on your own (so that you get a hang of what information is to be recorded).

Also you can download this filled template and check, if the information you recorded, matches mine or not!

Question: I am sure you are using a mobile phone! Aren’t you?

Question: Did you ever hear that it is hazardous for your health?

Research says

• Radiations being received by the human body through the earpiece are likely to affect the brain of the human being-some of the experts opine.
• Some say that this would happen if the earpiece is less than a certain distance from the ear
• Others say that the danger only arises if the mobile is used for more than five minutes at a stretch.

Question: How do we come to a conclusion?

Answer: Out here Statistics comes to your rescue!

Besides the medical science involved in the above decision, a huge data in the form of the persons using the mobile phones, their age, their way of living, place of using the mobiles, duration of the use, extent of battery charge available in the mobiles etc. can be collected and analyzed before doctors take over to form an opinion in the matter.

So what is statistics?

Modern storage and analytical capabilities have tremendously increased the amount of complexity of data. To make any decision, important or unimportant in this world, one has to analyze the available data on that subject. And the only tool available to analyze data is called statistics.

Numerous examples can be cited from the daily life to show as to how one cannot take a prudent decision without using this tool –

• Launch of a product in the market for which one would require various market research data coming in form of tables (product wise or feature wise)
• Investing in a stock or mutual fund, for which one has to analyze the data like its earnings or its P/E ratio etc. or
• Decision whether one should pursue an MBA

As is clear, all these decision making process requires data analysis by using Statistics. No wonder, statistics is given huge importance in any portion of analytics. CFA any other professional examination which has a stress on Analytics lays a strong foundation for statistics.

Two branches of statistics are:

1. Descriptive Statistics: to describe data.

2. Inferential Statistics: to make inferences and also use hypothesis.

What is the use of statistics?

Take an example, let’s assume that we need to find the optimum age for having the maximum earnings from a group of people. We have data for 1 million records in the form of their age, sex and income.

If there is a person with age 11 has an income 90 dollars, a person with age 21 years has an income of 5600 dollars and so on. There would be one billion such records and to make any sense based on this raw data. To interpret this huge data, it would be highly difficult and stupendous task. However one has to find ways to meaningfully interpret this large data.

Making any judgment based on the raw data is called the descriptive statistics and it plays a very important role.

In order to simplify the things, we can form groups. In this particular case, groups with various ages are formed. Group 1 is 10-20 years age; Group 2 with 20-30 years and so on. For the first group, average income is USD 100, for the second one USD 10,000. We can similarly take different age groups and count their frequency. As age increases first, the income increases; then it starts decreasing and then it remains constant. And may be the maximum is achieved around 45.

We can show this data in the form of a graph or a table. There are various methods to represent the collected data which are:

• Graphical displays of the data in which graphs summarize the data or facilitate comparisons
• Tabular description in which tables of numbers summarize the data
• Summary statistics (single numbers) which summarize the data

In nutshell, various step used in Statistics can be summarized as follows:

• Collect data: in the form of as a poll or it could be in the form of questionnaire or whatever other means
• Classify data: as per frequency distribution tables
• Summarize data: so that average and variance groups could be found and it is clear as to how to I represent this data
• Present data: in terms of graphs
• Proceed to inferential statistics if there is enough data to draw a conclusion.

What is a real life application of Statistics?

The following application has been taken from the University of Melbourne paper to conclude that tall parents have shorter children, on average.

Sir Francis Galton (1822-1911) was the first to note that tall parents have shorter children, on average. His protégé and colleague Karl Pearson (1857-1936) studied 1078 father-and-son pairs. He found that the fathers’ average height was 68 inches and the sons’ average 69 inches. However, the tall fathers (say, of height 72 inches, within the vertical strip on the graph below) had sons averaging 71 inches. They were one inch shorter, on average. On the other hand, the sons of short fathers (say, 64 inches in height) averaged 67 inches in height. They were three inches taller, on average. Galton termed this phenomenon "regression to mediocrity". Ever since, the method of studying how one variable relates to another variable has been called regression analysis.

The figure shows the heights of 1078 fathers and their sons at maturity. Each father is paired with only one of his sons. Fathers and sons of equal height lie along the solid line on the figure (x=y).

The figure is based on a graph from Statistics by Freedman, Pisani, Purves and Adhikari.

CFA is the gold standard in education and lays a strong foundation on Quantitative Analysis and understanding the principles of Statisics. If you are interested in gaining a fundamental stronghold on your finances, you can consider enrolling for the CFA Examination. More details about the examination can be obtained by sending an email to info@edupristine.com or calling +91 989 298 0608

If you remember in our Profit and loss statement article we have mentioned that profit and loss statement is prepared on the basis of accrual accounting i.e. all incomes earned or unearned and expenses incurred or outstanding in a period are considered in preparing the statements. So to see the cash movement (i.e. actual cash received and paid) in a period we prepare the cash flow statement.

Continuing with our example

In your chocolate business whatever cash you receive from and pay in your core business operations is called the operating activity.

The amount you invest in the plant & equipment is the investing activity. Furthermore if your organization invests excess cash in short-term securities or provides loan to its employees, it will come under investing activity.

The funds that you have borrowed to start your business and your contribution will come under financing activity. If in future your business grows and funds are borrowed to support this growth from bond issuance or through IPO, then it will also come under the Financing activity.

The Cash Flow Statement is a consolidated view of these different activities (operating, investing, financing). There are two methods for preparing the cash flow statement.

Indirect Method

Under indirect method of cash flow statement, to calculate the Cash from operating activity, we start from Net Income and adjust non-cash charges, non-operating items and changes in working capital. Cash flow from investing and financing activity are calculated in the same manner as in the direct method.

Procedure for Indirect Method

Step 1: Link the relevant profit and loss items to the Cash Flow from Operation (CFO).

Step 2: Link the relevant balance sheet (i.e. changes in working capital) items to the CFO

Remember

Increase in assets = Outflow (-)

Decrease in assets = Inflow (+)

Increase in liabilities = Inflow (+)

Decrease in liabilities = Outflow (-)

Account Receivable has increased in 2011 so it’s an outflow

Step 3: Sum all the line items in the CFO

Step 4: Calculate the cash from sale of land

Cash from sale of land = Decrease in asset + Gain on sale of asset.

Decrease in asset information you will get in Balance Sheet.

Gain on sale of asset information you will get Profit and Loss Statement.

Step 5: Calculate the purchase of Plant & Equipment (P&E)

Purchases = Ending (P&E) – Beginning (P&E)

Step 6: Sum the Cash from sale of land and P&E to get the Cash Flow from Investing Activity

Step 7: Calculate the cash from sale of Bonds

Bond = Ending Bond – Beginning Bond

Step 8: Calculate the cash used for stock repurchase

Stock repurchase = Ending Common stock – Beginning Common Stock

Step 9: Calculate the Cash used for dividend

Cash Dividend =-Dividend Declared + Increase in Dividend Payable

Step 10: sum the sale of bonds, stock repurchase and cash dividend to the cash Flow from Investing Activity

Step 11: calculate the Net Cash flow

Net Cash flow = CFO + CFI +CFF

Step 12: Calculate the Closing Cash Balance

Closing Cash Balance = Beginning Cash Balance + Net Changes in Cash Flow

Do note: That this closing cash balance has to be linked back to your Balance Sheet’s cash balance, thus completing the Balance Sheet.

Direct Method

Under direct method of cash flow statement, to calculate the Cash from operating activity, we start from revenue and adjust the cash received and cash paid i.e. only the cash transaction during the specific period is consider.

*Under both the method cash flow from operating activity will be same only the presentation differs.

Procedure for Direct Method

Step 1: Calculate the cash collected from customer

Cash Collection = Revenue – Increase in Receivables

Increase in Receivables = Receivables₂₀₁₁ - Receivables₂₀₁₀

Step 2: Calculate the cash paid to supplier

Cash paid to supplier = -COGS + Decrease in Inventory + Increase in Account Payable

Decrease in Inventory = Inventory₂₀₁₁ - Inventory₂₀₁₀

Increase in Account Payable = A/C Payable₂₀₁₁ - A/C Payable ₂₀₁₀

Step 3: Calculate the cash paid to labors (Wages)

Cash wages = – wages – Decrease in wages payable

Decrease in wages payable = Wages Payable₂₀₁₁ - Wages Payable ₂₀₁₀

Step 4: Calculate the Cash Interest Payment

Cash Interest = -Interest Expense + Increase in Interest Payable

Increase in Interest Payable = Interest Payable₂₀₁₁ - Interest Payable ₂₀₁₀

Step 5: Calculate the Cash Taxes Paid

Cash Taxes Paid = – Tax Expense + Increase in Taxes Payable + Increase in deferred Tax Liability

Increase in Taxes Payable = TaxesPayable₂₀₁₁ - Taxes Payable ₂₀₁₀

Increase in deferred Tax Liability = Deferred Tax Liability₂₀₁₁ - Deferred Tax Liability ₂₀₁₀

Step 6: Finally add all the line items calculated above to get the Cash Flow from operation (CFO)

Procedure for calculating Cash Flow from Investing and Financing Activity is same as in the indirect method.

Thus, we come to complete our Cash Flow Statement and the Balance Sheet as well.

Cash Flow Statement Templates to download

I have created a Cash Flow Statement template for you, where the subheadings are given and you have to link the model to get the cash numbers! You can download the same from here. You can go through the case and fill in the yellow boxes. I also recommend that you try to create this structure on your own (so that you get a hang of what information is to be recorded).

Also you can download this filled template and check, if the information you recorded, matches mine or not!