BIZ TOPICS
BIZ TOPICS
Business Basics for Engineers by Mike Volker, P.Eng
(For supplementary reference purposes only. E&OE).
(To find a particular word, just use the "EDIT-Find In Page" function in your web browser.)
Class#1 5Sep96: GDP, National Deficit, Taxes, Prime Rate, Insolvency, Marketing, Risk Factor
The GDP, or Gross Domestic Product, is a statistical measure which, in essence, tells us what Canada's domestic output is. Think of it as the aggregate "sales" of all companies operating in the country. Technically speaking, the GNP (Gross National Product), another frequently referenced statistic, and the GDP differ in the way in which imports and exports are accounted for (i.e. take total Canadian spending, add exports, subtract imports, add change in inventories). Usually the percentage changes are tracked and reported (e.g. in Monday's Report on Business) to give us some idea as to how our economy is performing overall - relative to our past performance. It is also useful in comparing our productivity to that of other countries. Check out Major Nations Economic Indicators for some comparisons. What is our GDP? How does our National Deficit (i.e. Canada's total indebtedness) compare to GDP? What percentage of GDP is paid in taxes?
Taxes and death are the only two things we can really count on in life. In Canada, the top marginal (taxes are on a sliding scale in Canada based on one's income level) tax rate in Canada is 54%! Corporate taxes (for large companies) are comparable to this rate (small companies enjoy a break, paying in the 20-30% range). We have many forms of taxes and they are often hidden (e.g. fuel, alcohol, etc). The taxation levels can be a real problem for Canadian technology companies when recruiting talent (e.g. seasoned marketing professionals) from other countries, such as the USA.
The Prime Rate is the best rate of interest charged by the commercial banks to their preferred (i.e. very credit-worthy) customers. It is presently at 5.75%, which is very low when compared to recent history. The Bank of Canada rate is 1.5% below that and is the rate at which banks can borrow from the central bank. The Prime Rate is a very useful "indicator" to track on a regular basis. It is the single most important factor in predicting business behavior such as raising capital, capital equipment acquisitions, cost of financing assets, etc.
Companies are insolvent when they do not have enough cash to meet their obligations (i.e. pay their bills). They are technically bankrupt. Very profitable companies can actually be insolvent. This often happens when a technology company rapidly ramps up its sales, making production purchase commitments for which it does not have adequate cash on hand. Later on, we will be spending some time on doing cash flows so that we can see the difference between profitability and cash flow.
Marketing, I believe, is the most important corporate management function. We have to be careful not to confuse marketing with selling (to be covered during classes #2 and #3). Good marketing ensures that a company always has viable, in-demand, competitive products. Sure, other functions such as engineering and finance are also very important, but if we don't start with good marketing - we may not have a business!
The Primary Risk Factor in business today is COMPETITION. We can control or mitigate most risks, but we cannot control the competition (unless, of course, we buy-out the competition - which is often done!). In any efficient market, in which there is a basic demand for our products, the only real, uncontrollable threat to our success is the possibility of being beaten by a competitor. Companies have to be constantly innovating (not only in their products, but in their marketing strategy) in order to prevent being left behind by their competitors. If you snooze, you lose!
Class#2 12Sep96: Incorporation, P/E Ratio, Dumping, Taxation: Avoidance/Evasion, 4 P's of Marketing (Lecture)
Incorporation is the process of creating a legal, tax-paying entity. Businesses or companies can be incorporated or unincorporated. If unincorporated, the owner(s) of the business personally take on the assets and liabilities of the business and are personally responsible for all taxes. When incorporating, which is simply a legal registration process, a new, tax-payer is, in essence, created. Incorporating a business is a straightforward process. Lawyers and other agencies usually provide this service. There is even a company which allows you to incorporate in any State in the USA for a reasonable cost (check out www.incorporate.com). By incorporating a business, the owners of the business are personally shielded from most liabilities which that business may incur - this does not apply, however, to the directors of the company who may still be liable for certain actions. In Canada, companies do not need to use any specific identification such as "Inc" or "Limited" or "Corp" to identify themselves as legally incorporated businesses, although these descriptions are commonly used.
P/E, or Price/Earnings ratio is calculated by taking a stock's current price, divided by its most recent annual net profit on a per share basis. It gives a measure of return on investment and performance of a company relative to its industry. For example, technology stocks usually have a P/E around 20. That means that a stock which is trading at $20 per share, earns $1.00 per share in profit. New companies usually have high P/E ratios because they are expected to grow quickly. If a company has a low P/E relative to similar companies, it could represent an undervalued investment opportunity.
Dumping occurs when foreign companies have goods on hand that they sell in Canada at a deep discount to prices they might charge in their own or other markets. This often occurs with commodities - moreso than with manufactured goods. But it does happen and as you can imagine it creates problems for domestic manufacturers and is often the subject of inter-governmental trade disputes.
Taxation, like death, cannot be avoided. In fact, someday we'll all be taxed to death! So, we play a little game called tax avoidance which is perfectly legal. It simply involves planning, preparation, and some tax knowledge (or knowing a good tax advisor) to save in taxes that can be avoided within the limits of the law. Tax evasion, however, is illegal. For example, if you earn $100 in tips and don't declare this income, you are evading tax and that is very bad. In fact, in Canada, you are more likely to spend some time in the klink for tax evasion than you are if you murder someone! So, you can see how serious a crime this is. Never evade taxes. Or, if you really must, then do it for millions - not peanuts! But seriously - don't do it!
Class#3 19Sep96: Stock Splits, GST, Dividends, Buy-Outs, Quarterly shipments, Proxies
The "GST", Goods and Services Tax keeps coming up. Finance Canada has a web site which might help the curious student sift throught the various GST rules. It can be found at www.fin.gc.ca.
A Stock Split is when a company "splits" its shares. For example, last week Newbridge announced a 2:1 stock split. This means that for every share of Newbridge you own, you now own 2 shares. The Company simply gives you a dividend of one new share for every share which you own. Why do companies do this? If a stock price is considered fairly high, like Newbridge's - close to $100 - it may appear expensive to smaller investors. A 2:1 stock split would mean that the stock will be worth half the price - making it more affordable. The split also doubles the number of shares in the market - providing a higher degree of liquidity (i.e. trading volume) and hence a "fairer" price. Companies often do a reverse split as well, or a consolidation, as it is often called. This is done to avoid being seen as a "penny stock". It is a good tactic especially if there are "too many" shares on the market - as may be the case for a smaller growing company. This often happens on the VSE. How many shares does a typical company have outstanding? Why is the number significant?
Profitable companies sometimes declare a dividend for their shareholders. Growing companies generally do not do so as they re-invest their profits into growing the company as opposed to writing cheques to their shareholders. Dividends are entirely arbitrary and are determined by a company's board of directors. If dividends are not declared, shareholders nonetheless benefit because their shares are inherently work more. Companies can also pay a dividend in the form of shares of the company. Stock splits, for example, are accomplished by having the company simply issue stock dividends to shareholders.
A buyout is sometimes offered by companies to employees (e.g. as IBM recently did) to encourage them to leave the company as a cost-reduction measure - a better alternative to a forced layoff or termination.
Public companies are often obsessed with their quarterly performance, especially in terms of meeting sales targets. So, we often see companies scrambling at the end of a quarter to boost shipments in order to maintain shareholder confidence. When companies fail to do so, as Corel did last week, we sure do hear about it!
Shareholders of companies are entitled to vote at annual meetings of the company. A document, called a Proxy may be used by a shareholder to give a designated person, often an officer of the company, the right to vote on behalf of that shareholder. A shareholder could give a person (anyone) their proxy to attend and vote at an AGM (Annual General Meeting).
Class#4 26Sep96: The Dow (why a new high?), Stock Options and Warrants, Virtual Companies, Short Sales
The "Dow" is a stock index. It is the "price" of a collection of 30 blue chip industrials on the New York Stock Exchange calculated throughout the trading day. It provides a measure of how the overall stock market is performing using the largest companies as the standard. On Friday the 13th of September, the Dow exceeded 5800 points - an all time high! This is largely because inflation and retail sales have both shown minimal growth (.1-.2% in Aug96) and hence US Fed policy is such that interest rates will likely not increase in the immediate future. This translates into lower borrowing costs and higher profits - hence higher shares prices.
Stock Options and Warrants are a fascinating subject. Click on Options for some insights on this topic.
A Virtual Company is a very real company indeed. The term is often used to refer to a company which does an extensive amount of outsourcing - i.e. contracting other companies and parties to perform services. You could own a very large, successful virtual company which consists of virtually (pardon the pun) no employees and very modest facilities. You would run such a company by contracting with other firms to perform all the work that you might normally hire your own staff to do. What do think the advantages of running a company along these lines might be? Why is Compaq, for example, often referred to as a Virtual Company?
Believe it or not, you can actually sell shares in a company which you don't own. This
is referred to as Shorting a stock. Electrical engineers love this concept! When
you short a stock, you sell it with the expectation that you can later buy it back at a
lower price and pocket the difference. Many investors and speculators will do this with
shares in companies which they believe are over-valued. Perhaps new technology hype might
put a trading value on a stock which is seen to be totally unreasonable. In such a case,
an investor might short the stock in anticipation that the market will eventually wake up
and realize that the stock price is inflated. So, how do you short? You can short a stock
by simply telling your broker to sell it short. This means that the broker will enter a
trade for your account (you usually have to put up the full dollar amount of such a
trade). In so doing, the broker effectively borrows the stock which he sold from other
accounts. If the stock goes up in price, you will be asked to provide additional
"margin". If you buy it back at higher prices, you take a loss. If you buy it
back as it drops in price, you take a profit. Shorting is a fun game. It also provides
some market stability insofar as it prevents stock from rising beyond a
"reasonable" price. Because shares can only drop to zero but rise to infinity,
shorting is a risky business with a limited upside profit potential. A less risky way to
short a stock would be to buy PUT options (see options.)
Class#5 3Oct96: Unsecured Credit, Outsourcing, Interest Rate Factors, Market Information
Companies are sometimes able to obtain Unsecured Credit facilities meaning that they effectively obtain credit without having to put up any collateral in the form of assets to secure that credit. Usually suppliers fall into this category - i.e. by extending payment terms on purchases. Shareholders may also provide such credit from time to time, especially in the case of majority owners.
Outsourcing means that a company will sub-contract some activities, such as production, to third parties. This is the subject of debate in the current GM Strike. Outsourcing reduces a companies overhead costs and often also reduces the variable costs. It also allows management to focus on other areas. Virtual companies rely almost entirely on outsourcing.
How do economists predict interest rates and what are the interest rate factors which determine what rates will be? Answer: they don't - at least not very well. The interaction between interest rates, currency exchange rates, and inflation factors is complex. However, it is all driven mainly by our economic performance - our production output. If we export heavily, our currency will strengthen because of foreign demand for it to buy our goods. If our currency is strong, there will be no pressure by the Central Bank to increase interest rates (ie. to prop up the currency). But if our growth, i.e. GDP, is too rapid, interest rates will tend to rise (partly precipitated by increased demand for capital) to keep inflation under control. As our output (esp exports) increases, our currency will also strengthen. But then, how far can interest rates and our currency rise? What is our government's fiscal policy? (It is to keep inflation in the 1 to 3 percent range). What is the relationship between Can-US interest rates and Can-US exchange rates? Canadian long-term interest rates should be below US long-term rates because of superior Canadian inflation fundamentals.
Market Information is readily available. There was a good article in the Globe
and Mail on convenience stores which cited a number of interesting facts. This type of
information is very useful when doing market research and is surprisingly easy to find,
especially today with the worldwideweb as a tool.
Class#6 10Oct96: Debentures, Receivership, Insider Trading, Class-Action Suits, Stock Price
A Debenture is a form of corporate debt. A debenture holder may have certain rights. For example, a debenture may earn interest. But - here's how it gets interesting - a debenture may have a conversion feature - i.e. the holder may be able to convert it into common shares at a fixed price for a given period of time. In this manner, the debenture holder may benefit substantially from any appreciation in the share price of the company - but on the other hand, the holder ranks higher on the list of creditors than do ordinary common share holders (who rank lowest). This form of financing is, surprisingly, not used that often - especially by smaller emerging companies. I suspect that it is something the banks are studying carefully as a means by which they can take higher risks with companies that are not well collateralized. Note that recently Paul Martin went so far as to tell the banks that they had to be more flexible in providing capital to small enterprises. Let's see what happens over the next few years!
When a company is insolvent (i.e. when it can't pay its bills and meet its debt obligations), it may be put into Receivership. A Receiver is an independent person (usually an accounting firm) who attempts to reorganize a company, i.e. clear its debts and again become solvent. If a receiver cannot settle with the creditors, then the company becomes bankrupt and the receiver really becomes a liquidator - selling off whatever assets are left and settling with as many creditors (in a well defined pecking order) as possible. However, if the receiver makes a settlement with creditors (which could be a small percentage in cash on the amounts owed - or it could even be through the issuance of shares in the business), then the company can continue to operate. Often, companies which are profitable can become insolvent because they have grown too quickly and have run out of cash to fuel their growth!
Insiders of a company are those people who are directors or senior officers or individuals who hold more than a 10% voting interest in the company. If these people buy or sell shares (publicly or privately) in their company, they are doing what is referred to as Insider Trading. Many people think that this is illegal. Well, it isn't. What is illegal is illegal insider trading. So, what does that mean? Simple: If an insider trades on information (good or bad) which has not been disclosed to the general public, then that person is benefiting from insider knowledge and by trading on this knowledge that person is effectively stealing from the unwary public. All insiders must report their trading activities at the end of each month. By so doing, the public can assess the actions of the insiders. If it turns out that an insider traded around the time of a news dissemination, s/he may be the subject of an investigation to ensure that there was no insider trading.
In the U.S., shareholders of companies benefit from so-called class-action suits. No - these aren't obtainable from Harry Rosen's men's wear. Actually, there is nothing classy about these suits. They are law suits launched by lawyers (usually) in favour of a broad class of litigants, usually the entire lot of shareholders of a company. So, if a lawyer or shareholder thinks that insiders, for example, have derived undue benefits from their trading, a class-action suit may be launched against them or the company. This has a self-policing effect in that officers are kept honest by the threat of major litigation. In Canada, such actions are not well known or practised - at least, not yet. So, watch out!
Stock Price is set by the market (assuming that there is a market such as a public exchange like the VSE, TSE, or NASDAQ) participants - that is - the buyers and sellers through, yes - you guessed it - supply and demand. Stock price often bears no relationship to the fundamentals (basic business and financial condition) of a company. A lousy company may have its stock hyped or promoted to the point where the stock price is not reasonable. Similarly, companies that are good solid firms (need I mention any??) which do little stock promotion, may trade at prices which are below those of other similar companies. Companies do not - repeat - do not - set the price of their stock. It is always set by the market.
Class#7 17Oct96: Fundamental vs Technical analysis, Fully Diluted Earnings, Escrowed Shares
When analyzing the performance of corporate share prices (or other prices such as commodities futures), there are two common approaches: Fundamental Analysis or Technical Analysis. Fundamental analysis relies on examining a company's intrinsic performance: Financial statements, management strength, market position, etc. and attempts to relate this analysis to the share price of a company - i.e. is it undervalued or overvalued? Technical Analysis refers to the study of the trading prices and volumes of the stock, e.g. is there a trend or a pattern in the share price? Technical analysis is practically useless for small-cap firms. Often, a combination of the two approaches yields the best result, e.g. "the charts say that Company ABC is poised for a price break-out while the fundamentals suggest that the stock is greatly undervalued."
Fully Diluted Earnings are the earnings on a per share basis where the total number of shares takes into account not only the issued shares but also shares which might be issued in the future if all existing options on shares where to be exercised. Since companies often have, on average, granted share purchase options equal in number to 10% of the issued number of shares, fully diluted earnings can be as much as 10% less than earnings based only on issued shares. This figure is a more useful or conservative indication of a company's performance.
Escrowed Shares are shares which have been issued but which cannot be traded by the holder. Such shares may be held in escrow by a trust company until either a certain time period hClass#7 17Oct96: Fundamental vs Technical analysis, Fully Diluted Earnings, Escrowed Shares as lapsed or until certain corporate performance targets have been achieved. The purpose behind this is to ensure that insiders who acquired stock very cheaply (i.e. for nothing or for pennies) cannot flip their shares to the public until they have been effectively earned by the holder. Founders of a company typically pay nothing for their founders shares. Outside investors, i.e. the public, who pay a substantial price for their shares need assurances that insiders are not cashing in prematurely.
Class#8 24Oct96: Extraordinary Charges, Book Value, Goodwill, Acquisitions, Judgement-Proof, Market Capitalization, Burn Rate
When companies report their quarterly results, they sometimes report Extraordinary Charges against earnings. These are typically non-recurring charges which are out of the normal course of business. This often happens when a company or an asset is acquired by another company for a price which is in excess of the book value of that asset. The book value is the value as determined from the balance sheet of the company. An extraordinary charge occurs when a company is acquired for a vlaue which may be well in excess of its tangible, or book value. For example, if a software company has tangible assets of $1 million (cash, equipment, etc less liabilities), but is acquired or sold for $10 million, then an intangible goodwill amount of $9 million must be written off, i.e. expensed against earnings.
Companies often entertain acquistions of other companies whereby they make such acquisitons by exchanging shares. For example, a company could acquire another company by giving the shareholders of the target company newly issued shares for 100% of the company being acquired. Simply put, "we'll give you 10% of our company in exchange of 100% of your company."
Companies or individuals can make themselves judgement-proof by organizing their assets in such a manner as to make them inaccessible by creditors. For example: a businesswoman could make herself judgement-proof by putting the ownership of her key assets (house, car, investments) in the name of her children or spouse. In the event that she is ever sued, a successful litigant would likely not be able to collect on any judgement rendered in his favour because there are simply no tangible assets available for seizure.
The market capitalization of a company is effectively, its "market value" as determined by the product of the company's share price and the total number of shares issued and outstanding. Theoretically, it is the amount that you would have to pay to acquire 100% of the company. But, in reality, could you do this?
Burn Rate is a term used in the context of cash flow. (It was often used in Roy Trivett's talk.) It is not always used consistently in practice. Most often it refers to the monthly cost (i.e. expenses) of operating a company, before taking into account any revenues or variable costs. For example, if the burn rate is $50K per month, and we have cash or liquid assets of $300K, we know that we can operate for 6 months before getting into cash flow problems.
Class#10 7Nov96 (no topics for Class #9): Merger, Multinational Structures, hostile takeover, Interlisted companies, arbitrage, Listing Criteria, Audit
A merger involves two (or more) incorporated companies joining together to become one company. This is often done by having the shareholders in each of the separate companies exchanging their shares for shares in the new, merged company. Usually, one of the two companies is "wound up" into the other such that only one legal corporate entity remains.
Companies which conduct business in different countries and which often incorporate in different countries end up with fairly complex multinational structures. Companies like IBM (although you don't need to be large to justify an multinational structure) are incorporated in several jurisdictions and are interconnected through a web of corporate shareholdings. This is often done to minimize taxation. For example, a Canadian company which does extensive business in the USA and Europe may incorporate in these countries and the ownership of each of the "foreign" entities may be held by a holding company in a low-tax jurisdiction but which also has a favorable tax treaty with Canada. Through such arrangements, a low rate of tax is paid by the holding company and profits can be repatriated without being taxed at the higher Canadian rates. Neat, eh?
When a suitor attempts to gain control of a company, esp. a public company, the management of the target firm may oppose the takeover attempt. In such cases, the bidder is said to be engaged in a hostile takeover. Management often opposes such attempts in the hopes of realizing higher valuations for the stockholders. In other cases, the suitor may have ulterior motives which may not be in the best interests of management (i.e. management could get axed) and naturally management would resist. Yet, such takeovers may, in fact, be in the shareholders' best interests. A good example of a hostile takeover can be seen in the Danny DeVito flick, "Other Peoples' Money". In this example, did the shareholders end up better off? You bet!
A Poison Pill is a means by which a company can make it painful for an acquisitor. For example, a Poison Pill may be a right given to shareholders entitling them to buy more shares in a company under certain conditions. If someone wishes to take over a company, the shareholders could exercise their rights, making the deal more expensive for the acquiring company. In essence, the Poison Pill would have to be swallowed (because it goes with the company) for the deal to proceed.
To be listed on a stock exchange, companies must meet that exchanges listing criteria. These criteria often determine the "quality" of the stocks which trade on that exchange. For example, the TSE requires a greater track record of performance and a stronger balance sheet than the ASE or VSE. So, naturally, more advanced companies (hence, lower risk - at least in theory!) are listed on the TSE.
Companies' financial statements are sometimes subjected to an audit by a bona fide accounting firm, meaning that the statements are objectively checked and verified to ensure fair and total disclosure to the stockholders. For public companies, an annual audit is mandatory. Quarterly reports are unaudited. Private firms can do what they want and seldom go to the trouble of incurring an audit and the associated audit fees.
Class#11 14Nov96: Seed Capital, Restructuring, Reorganizing
In the news recently, there have been some encouraging articles regarding the availability of Seed Capital for emerging companies. The Business Development Bank of Canada (BDC) is making a comendable effort in this regard with the announcement of its $100 million seed fund. Seed capital, or early stage venture capital, is required by young companies at their early, typically pre-sales, stages of development involving investment sums in the $250K to $500K range. Traditional venture financiers have avoided this stage of financing and the start-up sources of funding (relatives, angels, etc) usually aren't prepared to invest this amount - leaving the new venture with few sources to turn to. Perhaps this explains, at least in part, why so many companies have difficulty making the transition from sales of $1 million or so to a multiple of that figure!
Restructuring, although it may be regarded by some as a euphemism for job-cutting involves corporate reorganizations in which subsidiary companies are sold, spun-off, or merged with other firms in an effort to allow companies to focus on their so-called "core competancies". Generally speaking, this is positive for shareholders because it shows that management recognizes that there are internal problems and this is one possible solution. Unfortunately, many times restructuring only creates the illusion of progress.
Restructuring is sometimes also referred to as reorganizing although the latter more correctly refers to a balance sheet financial reorganization (such as debt to equity conversions) to make a sick company appear healthy.
Class#12 21Nov96: Board Bailouts, Careers, Start-Up Tip, Mission Statements
Last week, Canadian Airlines suffered from a Board Bailout whereby the entire board resigned. The board was afraid of being held personally liable for corporate debts in the event of a bankruptcy. They did this on the advice of Canadian's lawyers. So much for corporate accountability! So much for the country's laws which encourage such "irresponsible" actions! So much for lawyers!
It is a hot Careers market for technical people, especially engineers. There are more jobs than there are qualified people and the situation is not expected to approve. So, the climate for all you new grads is excellent!
A recent Globe article referred to a web software startup. A good Start-Up Tip in this article suggests that a good starting place is to get a customer as early as possible. This gives encouragement, credibility, and focus. It should be possible to obtain purchase orders on the strength of your specifications. If not, you should really ask why.
Mission Statements are used by companies to help them identify to their customers, suppliers, and personnel exactly what their purpose in life is. They are useful in that they help people understand what "direction" a company is taking as opposed to what a company is "doing". Good statements are those which specifically focus on a company's purpose while at the same time being broad enough to allow for growth and new opportunities.
Class#13 28Nov96: The Entrepreneur Myth, Intrapreneurship, Out-Licensing
The E-myth is a term coined by Michael Gerber, a small business guru/consultant. He observed that many people who start comapnies are "technicians suffering from an entrepreneurial seizure". That is, just because you may be a good plumber, hairdresser or computer programmer does not mean that you will also be good at running a business which does plumbing, haridressing or software. Different skills are required to run a company. Good entrpreneurs are those who can build a business "machine" and then have that machine work for them, even in their absence!
Intrapreneurship wasn't discussed today BUT here's what it's about: Big companies are successful mainly because there are corporate entrepreneurs - a.k.a. intrapreneurs - who get things done! If you are a top-notch engineer and you love doing engineering, it may be best for you to find a position with IBM, GE, or 3M rather than start your own company (am I heretical? No - I don't think so!) because these companies need people like you! You can create and develop within a structure and not have to worry about cash flow, finance, or other business issues. Yet, if you're intrapreneurial, you can also be quite handsomely rewarded - monetarily and recognition-wise! Outlicensing is when a company has developed something which it may license to another firm for commercial exploitation rather than doing so by itself - perhaps because the invention may not be a good business fit or because it may require other resources to successfully commercialize it.
Class#1 4Sep97: GDP, Prime Rate, Risk Factor
GDP in simple terms in the sum of all goods and services produced in an economy. Think of it as the aggregate sum of all companies' sales. The Prime Rate of interest is the lowest rate of interest charged by commercial banks to their best, most credit-worthy customers. The only real risk factor in business today is the competition. Everything else can be managed. But since you can't manage the competition, what is left. Just yourself!
Class#2 11Sep97: Junk Bonds, Blue Chips, market capitalization, Bulls and Bears, Payroll Tax, BC's High Tech Policies, R&D Funding Support.
Wyatt Cheng asks...."What are junk bonds?". Junk bonds are simply low-grade corporate bonds. They often pay high interest rates and are sometimes sold at substantial discounts to their face value.
Ashish Gupta inquires... "What are purple & blue chip companies?" Purple is an as-yet-uncoined term, likely refer to top of the line companies. Blue Chip companies are the large cap ($1B or so) companies. You might ask, what's "large cap"? Cap is short for market capitalization. This is the "value" of a company based on its current stock price. Just take the trading price and multiply times the number of shares issued. E.g. is a company is trading at $8.00 and there are 20 million shares issued, the market cap is $160 million. Ashish also asks.... "What is meant by bulls and bears?". Bulls are people who are bullish (it will charge ahead) on the stock market and bears are those who fear that it will retreat.
Janey Yang wonders.... "What is the difference between payroll tax and income tax?". Companies pay income tax on their net profits (annually). Some provinces levy a payroll tax, e.g. 4% on a company's monthly payroll - like a surtax.
Pavel Haintz contemplates numerous questions relating to the BC high tech community and government policy. For example, where does BC rank in North America. What attracts companies to BC? Do the NDP's pro-labor policies have an impact? These are all good questions. Some provinces, like Quebec, are offering significant tax breaks to lure high tech firms to the province. B.C. has no such policies. In fact, other than a great lifestyle and access to talent, B.C. has little to offer.
Victor Ting raised a number of concerns about Canadians' conservatism and whether or not he should go offshore to seek funding for an esoteric R&D project. This may be a contentious point. It is my view, that good projects put forward by good people will always get funded. Canada, like other countries, has both conservative and adventuresome people. It often boils down to where you look.
Class#3 18Sep97: market indicators, insolvent, interest rate issues, pricing
Bill Boora knows that the DOW JONES industrial average, TSE indicators, etc. are all stock market indicators which show how the market is going. How exactly do these work? Ravjit Dhiraj has a related question: What is the difference/relationship between the TSE 300, TSE 35, and TSE 50? These are all simply measures of different "bundles" or groupings of stocks. For example, the DOW is a weighted average of 30 top blue chip firms listed on the NYSE. The TSE 300 is a weighted average of 300 blue chips on the TSE. These indicators tell us how a particular "market" is faring.
Ravjit also asks: What does it mean when a company is insolvent? (The term was mentioned in the first intro quiz). A company is insolvent when it cannot meet its financial obligations. Ironically, it may be profitable, but its cash flow may be such that its cash outlays are far in excess of its inflows and will therefore default on its terms with its creditors and bankers.
Victor Ting has some interest rate issues....this morning). If the bank decides to raise the interest rates, wouldn't that be bad for business? Yes, likely. It certainly wouldn't be great for business - unless - it means higher rates in the short term to stave off inflationary pressures in the long term. When Victor says "I would assume that higher interest rates would make it less attractive to borrow money for expansions and upgrading and the like", he is quite right.
Pavel Haintz is curious about pricing. Why do prices end in 99? (example $499.99). This is weird, why not just make the price $500? Simply psychological! Companies can offer a product for "less than" $500. As a related question, Kevin Leung wants to know if the pricing method has to be justified. Yes, definitely! Pavel also asks, "How do CEO earnings compare from around the world, not just the US and Canada (Japan? Europe? Asia?)?" Tough question! You have to consider this in relative terms. For example, which currency would you use to compare? How do living standards and living expenses compare in these countries. How do stock options and bonuses figure into the calculation? Even within a country, CEO earnings vary greatly - over many order of magnitude. Pavel, you'll just have to be a CEO in a few different companies and report back to us - and - don't forget to include the perks!
Class#4 25Sep97: GERD vs GDP, merging two companies, common shares, market capitalization, share prices, dilution, escrow, write off
Iris Lin has a few questions. What is GERD and how is it related to GDP? GERD is simply Gross Expenditures on R&D. It is usually expressed as a percentage of GDP. R&D Expenditures in Canada for 1997 are estimated at $13Bn, 64% of it coming from Business. Universities account for 21% of this and the federal government for 11%. The GERD/GDP ratio for Canada is 1.64% (Our competitors' ratios are: USA: 2.54, Germany: 2.26). As for provinces, the GERD/GDP ratio winner is Quebec at 1.94.
Iris also asks about "merging two companies" and how a merger helps the companies. (Does it not create job loss for some people even though it's a great way to eliminate competition and expand? Under what circumstances would a company consider such an idea?) Bang on, Iris. You've got the idea.
Iris asks "What are common shares?" Common shares define the basic ownership of a company. Each share means that the owner of that share is entitled to vote on the affairs of the company and is entitled to share in the profits of the company (for as long as s/he is a shareholder). There is no limit to the number of common shares a company may issue. As companies grow, they generally issue more shares, e.g. to attract new investors.
Craig Schelp asks if the number of outstanding shares affects share prices? (The CEO of Triant Technologies said there quite a few shares outstanding when asked.) Yes, slightly - because of supply and demand factors. Also, more shares means a lower price per share (given a constant market cap for the firm) making them more affordable which in turn could increase demand slightly.
Craig also asks, "what is dilution?". Whenever new shares are issued from the "treasury" of a company (i.e. when a company "prints" new shares), all existing shareholders are diluted. For example, if 10 million shares are issued and a company raises more capital by selling 2 million newly created shares, all shareholders would be diluted by 16.6%. E.g. if you held 1 million shares, you owned 10% before the new issue. After the new issue, you would still own 1 million shares, but this would only represent 8.33% (i.e. one-twelfth).
What does it mean to have shares in escrow? This means that shares may be "owned" by someone but cannot be traded. In essence, they are held in trust by a third party. This is often down when founders of a company receive cheap stock. Escrow provisions prevent insiders from profiting too early by selling their shares into the market for a quick profit.
Naomi Ko wonders about tax-breaks when you are your own boss. She understands that you can write off various expenses to your company. Yes, this is exactly correct. If you pay yourself a wage, this wage (as well as other expenses, e.g. entertaining, travel, memberships, office space, etc) can be deducted as a business expense (reducing the business's tax, but you would then have to pay income tax on the wages earned). In general, it is to your advantage, tax-wise, to be your own boss because you can also write off expenses that you might otherwise not be able to write off. Naomi asks if you can invest "on behalf of your company"? (i.e., buy bonds, stocks, GIC's?) Sure. As long as it is legally incorporated, it can buy such assets under its name.
Class#5 2Oct97: Bank of Canada Key Lending Rate, Interlisting, NASDAQ, GDP vs GNP, Syndicate, Warrant, Reverse Take-Overs, Oversubscribed Share Offering, Book Value vs Market Capitalization, Preferred Shares and Warrants,
The Bank of Canada Key Lending rate is the "wholesale" interest rate charged by the bank of Canada to commercial banks on overnight loans. This rate is generally set or determined by the government's fiscal policies.
David Williams was reading about the software company Cognos and noticed that its stock is listed on the TSE and on Nasdaq at different share prices. He was wondering how and why a company would list its shares on two different stock exchanges (this is referred to as interlisting). Here's why: The TSE trades in Canadian funds whereas the NASDAQ trades in US dollars. Often, companies will list on two exchanges in order to expand their trading markets. The NASDAQ will attract US investors and the TSE will attract Canadian investors (even though Canadians and Americans can freely trade on either exchange!). So, many companies who wish to broaden their investor base, e.g. in the USA, will list not only on a Canadian Exchange but also a US exchange such as NASDAQ.
Footnote: the NASDAQ (National Asssociation of Securities Dealers Automated Quotations) Exchange is an electronic exchange based in the USA. It is on this exchange where most silicon valley high tech companies are listed (even a number of Canadian ones - Ballard, Spectrum, MDSI Mobile Data, Corel, etc).
Aaron Bingham raises some good points:
1. What, if any, is the difference between the GDP and the GNP? The GDP, or Gross Domestic Product, is a statistical measure which, in essence, tells us what Canada's domestic output is. Think of it as the aggregate "sales" of all companies operating in the country. Technically speaking, the GNP (Gross National Product) and the GDP differ in the way in which imports and exports are accounted for (i.e. take total Canadian spending, add exports, subtract imports, add change in inventories). Usually the percentage changes are tracked and reported (e.g. in Monday's Report on Business) to give us some idea as to how our economy is performing overall - relative to our past performance. It is also useful in comparing our productivity to that of other countries. Check out Major Nations Economic Indicators for some comparisons. What is our GDP? How does our National Deficit (i.e. Canada's total indebtedness) compare to GDP? What percentage of GDP is paid in taxes?
2. What is a syndicate? This occurs when several companies work together to achieve a goal. We hear of it most often in the Report on Business in the context of financial underwritings. For example, usually a number of brokerage firms (say Wood Gundy, Scotia McLeod, Yorkton, etc) will team up to raise money for a company by forming a "syndicate". (i.e.. a selling group).
3. What is a special warrant? (See Epic Data Sept 29 ROB) A warrant gives shareholders of a company the right to buy stock in that company for a certain price for a given time period. In principle, it is like an option.
Many of you have asked about RTOs, i.e. Reverse Take-Overs. Please read the article on RTOs on the website. I will cover this in class as well when we talk about financing a company.
Naomi Ko read an article on Bell Canada International and wants to know what the term "oversubscribed" means in terms of shares? (I.e., "... the issue of 18M shares was oversubscribed a staggering 10 times ...", and "... still ranks as one of the most successful and most oversubscribed IPOs"). When a company sells newly issued shares (i.e. from treasury), in this example 18M shares, there is a certain demand for those shares at the price set by the company (the price is usually at or slightly below the market price). If the demand is great, then there are more subscribers for these shares (i.e. new buyers) than there are shares - in this case 10 times as many requests for shares as there are shares - hence the term "oversubscribed".
Is "book value" = market capitalization? No, not at all. Book value is the net value (assets less liabilities) taken from a balance sheet. Market cap is what the company is worth on the public market (i.e. # of shares times share price).
What is the meaning of: preferred shares (.PR), warrant (.WT), right (.RT), instalment receipt (.IR) and debenture (.DB)? These are terms are found under the "ticker symbol" label of the stock indices. These are all various forms of securities that a company can offer. Common stock is the most common. These other instruments are other forms of corporate securities. A "right" or "warrant", for example, may be a tradable security offered by a company to its shareholders allowing them to purchase shares at certain prices, like an option. A preferred share is a special class of stock, usually non-voting, which offers certain privileges (e.g. mandatory dividends). For example, it so happens that Pavel was looking at the Bombardier stock and noticed that there are three types BombardrA, BombardrBSv and BombardrPrB. Again, these are just different classes of shares - each class of shares has different rights and privileges. Large corporations do this sometimes in order to raise capital in creative ways.
Class#6 9Oct97: Trade Deficit, Acquisition/Merger, Company Earnings, Meyers Briggs, Options, Tombstone
Iris Lin asks for an explanation of trade deficit. (Why can the American government pressure the Japanese government to deregulate its market to improve their trading?) Countries, just like companies, buy (import) and sell (export) goods. If the USA trades with Japan, it may have a trade deficit - meaning that it buys more from Japan than it sells to Japan. Sometimes governments will put pressure on each other to eliminate certain barriers which might make international trade more difficult for companies. Of course, companies have many trading partners. With some there will be deficits and with others there will be surpluses. On the whole, however, countries don't like to have deficits. This is the sort of thing that can weaken their currency.
She also wants to know what the difference is between the bonds listing on the back of ROB and something such as BC savings bond? Not much, really! It all comes down to "who" issues the bond - that determines how good (e.g. secure) it is and what kind of return one can expect.
Ming read (about an acquisition/merger) in Times that Worldcom is going to offer $30 Billion (in Worldcom stock) for MCI (which is by the way four times larger than Worldcom). Now it looks OK until I read to the part that says the deal won't cost Worldcom a penny because it will just issue some $30 billion more shares and swap them for MCI stock. For a person with an engineering mind like me, I have tried unsuccessfully making sense out of it. Using same logic, I can set up a company tomorrow, go public the day after and issue $200 billion stocks to acquire Microsoft. Of course Bill Gates will still hold most of the shares, but now I am the boss and Microsoft will have to take the name of my company!!! What is going on here ?!!! Great Question. Yes, Ming, it is true. This often happens just like you have stated it - more or less. This is often how companies merge with each other and grow bigger. In your example with Microsoft you overlook a couple of small points: 1)if Bill goes along with your deal, he will still be the boss because he will be in a control position in your company, 2)Microsoft's shareholders will have to approve the deal and in this regard they will ask: "why? what's in it for us?" If you have a good answer to this question, your deal may fly!
Acquiring a company via a stock swap is very similar to an RTO - except that control does not necessarily change and in fact the company making the takeover may itself be an active operating company - not just a "shell" (i.e. inactive) company. The scenario which Ming describes above with Microsoft is really that of an RTO.
Ming also thought that stock (?) is entirely seperated from company finance, e.g. shareholders do not receive company earnings, they are only benefited by a rising stock price which is somewhat fueled by good earnings. Is this true? Yes. Sort of - the shareholders may not be paid any earnings in cash (like a dividend) - this is up to the Board - but, the earnings benefit the company (e.g. can be re-invested for growth) and since the shareholders own the company, they also own these earnings.
Roland Chang noticed that a lot of recent articles in the ROB on management refer to Myers Briggs indicators (E, I, N, F, P, etc.) (When I attended Shad Valley, I know that we were administered an abridged version of the Myers-Briggs test, and were given a talk about what it is and how it is used by companies.) Interesting question! One of the toughest challenges in running a company is the people aspect: how do you foster teamwork, cooperation, enthusiasm, productivity, etc? Why are people in some companies happy and content and very dissatisfied in others? There are numerous consulting firms which help companies in the screening, selection, and development of their employees. As an example, check Siegel and Associates.
The question of Stock Options came up.Options are used in the marketplace by investors and they are used by companies as a means of compensating key employees for their performance. Please refer to more details on Options. Options are very popular and are widely used for both purposes.
A tombstone is a financing announcement which appears in the newspaper - to let investors know that a financing deal has been completed.
Class#7 16Oct97: Insider Trading, Class Action Suits
Insider Trading takes place when an "insider" - defined as someone who is a director or officer of significant (>10%) shareholder of a company - buys or sells shares in that company. This is perfectly legal except when trading takes place using privileged information which has not yet been released to the public. We often hear of insiders selling stock if they know that a weak earnings report is about to be issued. All insiders must report their trading regularly to the appropriate securities commission. This information is available on-line to the public. If you are about to invest in a company, you might want to find out if insiders are buying or selling. It may give you an indication of their own confidence level in the company.
Class Action Suits are generally initiated by lawyers on a contingency fee basis on behalf of a large group of plaintiffs. The USA has led the way in this area. Such suits have a self-policing effect on markets insofar as they discourage directors and companies from being even slightly "dishonest" for fear of aggressive legal actions! Just recently, a lawyer announced a class action suit against VISA for improperly charging credit card customers with foreign exchange costs.
Class#8 23Oct97: Derivatives, Underwriters, Off-market trades, IPO costs, Securities Acts, Honestly Speaking
Derivatives are financial instruments which can be traded (e.g. options, warrants, rights, futures contracts, options on futures, etc.) on various markets. They are called derivatives because they are "derived" from some real, underlying item of value (such as a company share or other real, tangible commodity).
Underwriters are investment dealers (i.e. stock brokers) who will "underwrite", i.e. agree to take a company public by selling the companies shares to the public.
Off-market trades are trades in shares (or other securities or derivatives) which are made between individuals who choose not to do so using brokers or an exchange. If Mary owns shares in Newbridge, she can take possession of these shares (since she bought them and owns them) and she can then sell them to Freddy at whatever price the two agree to without any participation by other parties.
IPO Costs vary depending on the size of an IPO offering and the exchange on which it takes place. IPO costs entail legal, accounting, and agency fees. IPO costs also include the selling agents' commissions - but these are generally reported separately because they account for most of the costs of an underwriting - but are in fact contingent on success (they are "just a sales commission"). The "fixed" costs run anywhere from as low as $75,000 on a junior exchange to several $100K's on senior exchanges. If an IPO is very broad (several exchanges or international), costs can run in the millions of dollars, excluding commissions!
Securities Acts are Acts of legislature which govern the issuance and trading of securities in their applicable jurisdictions (i.e. provinces, states, countries). It would surprise many entrepreneurs to learn that they have probably violated a securities act at some point. For example, the Securities Act of British Columbia is very specific about how (and to whom) a company - public and private - may sell shares. This is all in the interest of protecting the public from thievery!
Honestly Speaking, a recent major accounting firm conducted a study which showed that 20% of the population is inherently honest; 20% is inherently dishonest; and the other 60% will be act honestly or dishonestly depending on the circumstances!
Class#9 30Oct97: Securities Commissions, Currency Devaluation, Industry Associations
Securities (stocks, bonds, derivatives) are regulated by provincial government bodies to ensure that securities dealers and others comply with existing legislation. In Ontario, the regulating body is the Ontario Securities Commission (OSC) and in BC it is the BC Securities Commission. These commissions have fairly broad powers and can summon people to hearings, imposes fines and penalities, etc. Their role is mainly to protect the public and to ensure that an orderly securities market exists.
Some "countries" like Hong Kong (not really a country) do not have an open market system for currency exchange like Canada and the USA (note how the Canadian dollar has become a lot cheaper this past week! They basically make the market in their currency. However, this can only work for so long and at times they may be forced to "devalue" their currency in light of international pressures. By the way - currencies are generally measured against the US dollar (of course they are all measured relative to each other also).
Industry Associations act on behalf of their members to be the "voice" of their membership, especially when lobbying government for various actions. For high tech for example, CATA is the National voice and the BC Technology Industries Association is the provincial group representing tech firms.
Class#10 6Nov97: Buying Shares, Interlisting, Market Cap, Margins, Limited Partnerships, Stock Exchanges
Cecil (I thought he';d never ask!) is interested in buying shares of a company traded on the TSE. He queries, "how I could go about purchasing stock on a stock exchange? I really don't know where to start. Any other advice?". Easy - you need a broker. They're ubiquitous (esp. on Howe St). Also, check our Green Line or CT Securities. E-Trade allows for electronic trading. You will find these in Mike's Sites Listing under "Investing". Start by learning a bit about markets. Talk to experts. Start out with "paper" trading - i.e. not real money - just pretend. Most importantly - decide how much you want to risk and what types of risk you are willing to take (e.g. speculation vs income).
Cecil and Chris were wondering why some companies are traded on multiple stock exchanges. When assessing how much a company is worth, must we add the (stock price x #_of_shares) together from each exchange? See earlier notes on Interlisting. Careful - market cap = # shares issued (not # shares traded) times share price!
Kevin asks: "What are margins or margin calls in relation so buying shares in companies?" When you buy shares in a company, depending on the quality of the company (as measured by trading price), you can buy shares on margin, i.e. paying only 50% in cash and borrowing the balance from the broker. If the stock drops in price, you may be "under-margined" and may experience a "margin call", i.e. you have to sell stock or put more cash into your account. When markets are turbulent, investors often get margin calls in which case they have to sell shares which in turn further drives prices down causing other margin calls (hence, an avalanche effect).
Limited Partnerships are set up to allow large numbers of people to provide cash to a company which they can then write-off on their own tax returns (i.e. by spending the money on a business expense, e.g. marketing, in return for a percentage of sales revenue). The individuals have no liability. Such arrangements are managed by a "general partner" who can be almost anyone engaged to manage the limited partnership.
Stock Exchanges are simply places for trading shares. They are private, for-profit organizations which merely facilitate transactions for share holders. Companies must apply to an exchange in order to be listed for trading. Check out some exchange listing requirements!
Class#11 13Nov97: High Tech Talent, Apple's "mistake", Corel's NC, and Microsoft wins KPMG
High Tech Talent is in High Demand. Nortel recruits 20% of the country's graduating engineers! In Silicon Valley, engineers are auctioned off!
Apple's "mistake", according to a recent book by Jim Carlton, appears to be akin to Sony's Beta "mistake". Carlton claims that Bill Gates sent a secret memo to John Sculley (CEO at Apple) to encourage him to license the MAC OS. Apparently, Apple thought it best to keep it to itself. So look what happened. (i.e. who owns the O/S market?) What lesson can be learned from this?
Comdex is supposed to witness the introduction of Corel's NC. However, it looks like Corel is low-keying its debut for the time being. What is really going on? Is Corel shifting its focus to hardware?
Microsoft wins KPMG - Netscape thought that the lucrative KPMG account was in the bag. Then Gates himself jumped in and schmoozed KPMG over to his view of the world and won the deal. What does this say about tenacity and bit bull marketing tactics? Higher Tech doesn't always win the day!
Class#12 20Nov97: Spot Markets, Futures Contracts, Long and Short Positions
Spot Markets are current markets - unlike "forward" or "futures" markets in which pricing is based on some anticipation of the spot prices. Stock markets are examples of spot markets as are current currency exchanges (e.g. banks).
Futures Contracts are a zero sum game. They are simply a "paper" game used primarily for hedging (avoiding risk) purposes. For example, Canadian currency futures contracts could be used to lock in a foreign ($US) profit pending collection of that receivable. Futures contracts must always be closed out (i.e. unwound). There is always an equal number of long (bought) contracts and short (sold) contracts.
Long and Short Positions apply to most markets. Stock for example can not only be purchased, they can be sold - even if you don't own the stock. In such cases, you enter a "short position" which means that you sell shares which are, in essence, "borrowed" by brokers in the hopes that the share price will decline in which case you can buy back your short position at a profit. In stock markets money can be made not only by buying low and selling high later but also by selling high now and buying back low later! Neat eh? Short positions are reported weekly in the Globe and Mail (usually Mondays). Huge short positions can be dangerous because if holders of long positions ask for delivery of their shares, the "shorts" may be forced to buy on the market - driving prices up (defeating their original intent). Shorts are good for the markets insofar as they can provide some stability - i.e. "reasonable doubters" of hype may moderate price increases by shorting.
Class#13 27Nov97: Restructuring, One-Time Charges, Futures
Juliet Wyles was wondering about one-time charges that companies take for things like restructuring. How does the company come up with a number? Whenever a company experiences an out-of-the-normal profit or loss - for example if a company sold an asset, like real estate, for a substantial profit, or it it sold a subsidiary at a substantial loss, it would report these gains or losses as separate items - so that they are not comingled with operating results. If a company lays off people it may have to make severance payments and again would report this as a "one-time charge". Most commonly - and this is not a "negative" thing, a company will acquire another for market value well above book value. The difference is goodwill and must be written off when the balance sheets of the two companies are consolidated. So, this may look like a "loss" and a one-time charge, but may be quite acceptable and "good" for the company in the long run.
Futures contracts do not have an "exercise price", like options. As a futures contract approaches its expiry date, its price approaches, and eventually becomes equal to, the spot price. The two become one and the same. Will the spot price move towards the futures price or will the futures contract price move towards the spot price? That's an interesting question. The answer is that no one knows for sure - otherwise speculators could rake in profits like it's nobody's business! The key point to remember about Futures is that they are contractual "instruments" which are always liquidated.
Class#1 10Sep98: Prime Rate, B.C.'s potential to be like "Silicon Valley", Resource Sector Manufacturing
The Prime Rate of interest is the lowest rate of interest charged by commercial banks to their best, most credit-worthy customers. It is a key economic indicator - quite likely the one watched most often. In Canada, the Prime rate today (10Sep98) is 7.5%. In the USA, the Prime rate is 8.5%. Prime rate, the C$/U$ dollar exchange rate, and inflation are all interrelated. It isn't clear which of these could be called dependent (vs independent) variables. Perhaps they are all outcomes of something else (e.g. productivity, exports, etc). What do you think?? As a technology manager, why would you be interested in monitoring the prime rate?
B.C. has an emerging technology sector (see Mike's Outlook '98 pitch to the Vancouver Board of Trade) which could become a hotbed for certain technologies (e.g. new media, communications). This needs a critical mass in the form of some large companies which provide stability and a flow of technology and people. It also needs an industry-friendly government. B.C. hasn't done a great deal to be friendly. As a student, where would you like to work? In California you can start of with a salary around $70K (US!) after graduation and be taxed at only the 30% rate-maximum. In B.C., you'd start around $50K (Cdn) and once you make more than that, you'd be taxed at 54%. You tell me!
One advantage we have in B.C. is to take our heritage - i.e. our endowment of natural resources - and apply our brainpower to these to extract greater value. For example, MacBlo's "Parallam" project is a great example of how to engineer a better natural resource (timber) product. There are many opportunities for taking technology (robotics, controls, systems, etc) and applying it to logging, milling, mining, etc. Even the subsea industry is ripe for technology applications (check out Phil Nuytten's subs - or look closer to home at the Underwater Lab at SFU and its ties to companies like ISE.) This area is virtually untapped and the opportunities are immense! It'll take some vision and commitment (and entrepreneurs) to make it happen.
Class#2 17Sep98: IPO, Share Classes, Economics, Brain Drain, GERD/GDP, hostile bids, bank mergers, junk bonds, Stock indices, Interlistings, Market Cap
Matthew Choi asks: What is an IPO? IPO = Initial Public Offering. It is the very first time a company sells its shares to members of the public. After this, its shares will then trade on a stock exchange. It is sometime referred to as "going public". Entrepreneurs and VCs (Venture, or "vulture" Capitalists) sometimes call it "cashing in". Up until a company is public (i.e. anyone can buy or sell its shares), it is private and operates away from the limelight. Companies often go public to raise huge amounts of money or to give investors liquidity (what is liquidity?).
Mike Park inquires: What are the differences between Class B and Class a
shares? It all depends on how the company has defined its shares.There are no
universal definitions relating to Class A vs Class B. For example, one company's Class A
shares might be quite different from another company's Class A shares. Usually companies
have one type of share - i.e."common" shares. However, they sometimes also have
"Preferred" shares and sometimes several classes of preferreds. Usually, but not
necessarily, companies have only one class of common shares. The different classes permit
companies to assign different
rights to the shareholders of these securities. These rights may be important in order
to attract investors. The different classes may also have different voting or liquidiation
rights. The curious student is referred to Mike's paper on
incorporating.
Cyrus Sy raises two issues: 1. Russian Economic Crisis - Russia recently devalued its
currency. What exactly does it mean for a country to devalue its currency?? How does a
country "artifically" keep their currency at a certain value in the first
place?? Consequently, Russia's economy has taken a beating since devaluing the ruble.
Didn't Russia forsee a crisis by devaluing especially when they knew their economy was
weak in the first place? Devaluation is relative to the U.S. dollar. It means that it
takes more rubles to buy a buck. This is because the demand for rubles has decreased (i.e.
an international trade issue), hence less value. A country can artificially prop up its
currency by buying it (with US dollars) in the open market. This never works well in the
long run. Russia didn't devalue arbitrarily - they had to - you can only keep a finger in
the dyke so long before it'll burst! There has also been speculation that China will
devalue their currency. What are the pros and cons of devaluing a currency? It may have
to...same reasons as above...i.e. no demand (or reduced demand) for Chinese goods and
commodities. There aren't any "pros" that I can think of. There are many cons -
instability, investor uncertainty, interest rate increases, etc.
2. B.C.'s Economy - I know you've already criticised some of the NDP's policies as not
being business-friendly. My question to you is why then do fast growing B.C. companies
such as PMC-Sierra (which I worked for last fall) and Creo stay in B.C.?? You may say that
its because of the high standard of living, nice weather, the ocean...but really, why
wouldn't PMC relocate to Washington state, where the weather and scenary is just as nice,
but the taxes and business climate is much better?? Or they could just move to Alberta or
Ontario?? Tell you what: You worked at PMC-Sierra so call Greg Aassen or someone
senior there and ask them! I guess they are: proud Canadians, have local personal ties,
like to ski or sail...or...??? Of course -
there's always a cost associated with moving and then again many execs are hopeful that
the policies will change. One big advantage here is the infrastructure - the universities,
schools, suppliers, etc.
Chris Den Hann has noticed on my website that I mentioned a GERD/GDP ratio. What does GERD stand for and what is the significance of the GERD/GDP ratio? You will find the answers you seek at: http://www.sfu.ca/~mvolker/ensc300/topics-97.htm
Mr. Chen comments: The only bright spot on the horizon is the possibility of the U.S. Federal Reserve Board cutting interest rates, he said. "It would probably bolster the stock market, and inject a little more confidence among investors." Could you explain why cutting interest rates leads to bolstering the stock market? Reply: What do you think? Hint: If you have lots of $$$ to invest, would you be more inclined to invest in secure, low-risk, interest bearing funds if interest rates are rising? Also - if you're a company manager, wouldn't you be less likely to borrow money (at higher rates) to expand your business? Can you think of anything else?
Cyrus Cy notes that the G&M ROB reported that Alberta Energy launched a hostile bid for Amber Energy for $446 M. "My understanding is that company A can make a hostile takeover of Company B if it buys more than half of B's shares - even when B is not officially "up for sale". If this is correct, what kind of protection do companies have against being taken over in a hostile bid?" Not much. Poison Pills maybe - i.e. giving shareholders certain rights which would have to be swallowed by an acquistor. The whole idea is to take control of a company that, as the acquisitor see it, may be mismanaged - or have other potential. He goes on to ask: "How much control does a publicly traded company have over who buys their shares??" Very little! It's an open market system. That goes with being public.
Cyrus has a second question: The issue of the bank mergers has been a hot topic recently. I'm just curious to know what is your opinion on the "big is better" stand some of Canada's banks are taking. My personal opinion is that if the major banks are allowed to merge then we should give foreign banks more freedom to do business in Canada to encourage competiton (The feds currently restict them, right??) What are the pros and cons of expanding foreign competition in our banking system? I think competition is good. You might wish to read the report, etc. prepared by the Mackay Task Force on the financial services sector: http://finservtaskforce.fin.gc.ca.
Connie Su was wondering what the difference is between the TSE 300, TSE 100, and TSE 35 stocks. ("I was trying to find mathematical relationships but couldn't.") Thanks. The difference between the TSE300 and 100 is 200. And between the TSE100 and the TSE35 the difference is 65. Seriously! (i.e. the numbers refer to how many companies are in an index. The Index specification may also tell you what kind of company, e.g. blue chip, high cap, etc)
Raymond Yuen has a question about an article on Report on Business on the 15th, i.e. "Why would a decrease in interest rates in the US increase the value of the Canadian dollar? It would make investment in Canada more attractive - e.g. investors are less likely to invest in US bonds, etc.
Jerry Wong came across the term 'junk bond' when reading the news. "What exactly is a junk bond? Good Question. It is a low-grade, high risk bond, maybe "junk", even. E.g. a corporate bond issued by a firm with a low credit rating as opposed to a very "safe" government bond.
A question raised in class had to do with companies listing on more than one exchange. This is called "interlisting". It is quite OK and fairly common - esp. for Canadian companies to list on a Canadian and a US exchange. Pricing is NOT synchronized - but tends to be fair as a result of arbitrageurs taking advantage of any intra-market discrepancies. A company can list on any exchange as long as it meets the listing criteria. As you can imagine, different exchanges attract different types of companies, e.g. VSE - emerging companies, NYSE - senior US firms, etc.
Andrew Jones had a last minute query: His question has to do with the current plethora of so called "mega mergers". The banks are doing it, telecommunications companies are doing it, and so are others like Boeing and MD. Andrew comments: "Clearly some of these mergers are driven purely by a desire to become more efficient financially. The series of merges I find particularly interesting, however, are those amongst the baby bells. It seems although the split of AT&T is reversing itself! So... what do you feel is driving this seemingly mad rush to merge amongst these companies, and are any of these likely to result in monopolies like AT&T (or how far will the DOJ let them get?)". My response: It's a great corporate activity. A recent CEO survey showed that a major CEO preoccupation is corporate growth and expansion through acquisitions. CEOs love making these sorts of deals. It's all part of corporate motives to dominate and control markets. (btw DOJ = US Dept. of Justice).
Another noteworthy question from the floor was: What's "Market Cap"? Market Cap, or Market Capitalization is simply the product of number of shares issued and current price per share (i.e. MC = Price X #shares). In other words it is the value (at least in theory) that the market puts on that company. (Why do I say "in theory"?)
Class#3 24Sep98: DOW, OTC, "Index Points", Bulls & Bears, Trading Curbs, Warants
A few of you asked: "What's the DOW?" As mentioned briefly last week, the DOW is an INDEX. A Stock Index is a collection of stocks that represent a certain grouping (e.g. a tech group, blue chips, a broad market (many stocks like SP500), narrow market (high caps), or an entire exchange (e.g. VSE index)). The DOW is a collection of 30 of the biggest and best stocks that are traded on the NYSE.
Albert Chan: "What is OTC and how does it work?" OTC Means
over-the-counter. It is a way for stocks to trade which are
NOT listed on a stock exchange. It is a somewhat less formal, more risky way to trade
stocks. There are no "listing" rules. OTC markets can be highly manipulated.
But, they do serve a purpose - i.e. allowing investors to trade and get liquidity.
Waikia Lee: "I keep hearing how a particular stock exchange has lost or gained so
many points for a day; I was wondering how is a point in the stock exchanges
defined?" A point is like a dollar. It is calculated based on a "basket" of
stock prices. If you invest $1000 in an index which stands at 8000 and the index goes up
80 points (i.e.1%), then you've made $10.
Tulia asks (and others did to) about hostile takeovers. This topics and a discussion on poison pills can be found in this or last year's topics.
Kurt Krieger: "Could you explain what is meant by Bulls and Bears?" Bulls = strong, rising markets Bears = falling, retreating markets. It's jargon!
Kevin Citterelle: "I was just wondering what trading curbs are and how they work. When were they introduced to the NYSE and why?" There are limits imposed artificially to prevent the collapse of markets due to "programmed", i.e. computer-initiated trading. Allows the market to cool off and give traders time to think. They were imposed after the big '87 crash!
Tom Ip: "Please explain to us what a warrant offering is. How are they different from shares?" Warrants are similar to options - they give the holders rights to buy shares at a certain price for a certain time period. They themselves can be traded - just like shares.
Class #4, 1Oct98: Derivatives and hedge funds, Dividends, Foreign corporate ownership, Recession
Cyrus, Connie and others have asked about derivatives and hedge funds. "My understanding is that derivatives involve betting on what the price of a commodity, stocks, etc. may be in the future. What is the mechansim behind the trading of derivatives and why are they so risky?" Your observation is correct. A derivative is a tradeable "contract", created by exchanges and dealers. A warrant or option is the simplest form of derivative. The most common useage relates to the trading of commodity futures and options on futures - where pre-defined contracts relating to a right to buy or sell and underlying commodity or security are traded as opposed to the actual commodity or security itself. They are risky because they are time-fused and can expire worthless. Yet, the rewards are enormous and they are used primarily as HEDGING instruments. Hedge funds are funds managed on a private basis by professionals and may or may not include derivatives. In fact, not all hedge funds really provide any hedging. For a primer on hedge funds, check: http://www.kspcapital.com/primer/.
Arturo wonders what a dividend is. When companies make a profit they may, but they do not have to, pay some or all of that profit to their shareholders. To do this, they declare a certain amount, say $.15 per share and simply issue checks to all shareholders in accordance with their holdings. So, if you own 10,000 shares of EMJ Corp, you would receive $1500.00 as a "stock dividend". Tech companies, because they need the profits to fuel their growth (we call this bootstrapping), reinvest the profits in the company and generally do not pay dividends even if they are very profitable. Does this upset shareholders? What do you think?
Another question asked was "can Canadian companies be started by foreigners?" For BC companies, the majority of directors must reside in Canada, one of which must be a BC resident. The citizenship of directors is not an issue for the BC Registrar of Companies. For Canadian companies the answer depends on the size of the company and nature of the business. In either case, the shareholders need not be Canadians or resident in Canada.
Andrew comments: "There is much talk of recession lately, especially provincially and to some extent nationally. I gather recession defined as a consistent shrinking of a given region's GDP... is this correct? A story in the Globe this morning indicates July was the third consecutive month that the national GDP has droped (-0.3%). Paul Martin claims this does not indicate a national recession; at what point does this shrinking constitute a recession, and at what point would the recession be declared over?" Yes, there's actually a technical definition: An economy is in recession if GDP growth is negative for 2 consecutive quarters.But, then there's the preception aspect and the self-fulfilling prophesy at work, too. Do we believe that we're heading towards recession - in which case we likely will be - or do we believe that we're just having a bit of a hiatus pending international developments? Good question!! Footnote: How to tell we're in a recession? - When the Finance Minister denies it.
Class #5, 8Oct98: NPBT, Bank of Canada Rate, Profit Margin, EPS
Chia-Chi and others have asked: "What is NPBT?" NBPT is Net Profit Before Tax (as covered in the P&L Article). The reader is left to ponder what NPAT is.
Chia-Chi goes on to ask "Isn't the Canadian Prime Rate same as the Bank of Canada Rate?". Definitely not. The Bank of Canada is a wholesale rate which is basically an overnight lending rate by the Bank of Canada to the commercial banks. Banks usually base their prime rate (i.e. their lowest rate to their best accounts) on the Bank of Canada rate (i.e. the markup the bank of Canada rate). The curious student may wish to explore the "spread" between these two rates and also explore how the Bank of Canada rate is established.
And also "Is the profit margin same as earning per share?" No. It isn't. In succinct terms, Profit Margin = NPAT/SALES X 100% and EPS = NPAT/# SHARES. Both terms measure performance. One measures the efficiency of the money machine (i.e. performance of the company) and the other measures the per share performance (hence the share value) for the stockholders.
Class #6, 15Oct98: Tax Accounting, Stock Exchanges vs Securities Commissions
Tullia Mak poses an interesting Tax Accounting question: Is tax considered one of the
expenses (for P&L purposes) since an incorporated company needs to pay both income tax
and GST? Taxes are usually considered last. Don't include them in expenses.
That is why we have an NPBT line and an NPAT line on the P&L. GST is excluded from
both revenue and expenses - you are only acting as an agent for the government and you
track GST through a separate balance sheet account. GST will show up on your balance sheet
as a debt (A/P) offset by an equivalent amount of the (A/R less A/P GST components ) plus
any cash amounts of GST deposited to the bank account. (Just exclude all tax aspects for
now!)
Stock Exchanges are not government run (they are like companies run by their members). The TSE is even thinking of becoming a public company rather than one owned by its members. Securities laws and regulations are provincially administered via securities commissions which gives many pubcos a whopping headache - the rules vary from province to province. This may (hopefully) become a Federal matter (like it is in the USA).
Class #7, 22Oct98: Mergers, Good Will
Cyrus Sy asks about mergers: "BC Tel and Telus merged under rules that lets two companies of similar size combine their assests at book value to eliminate "good will" charges in excess of market value. What exactly are "good will" charges? What normally happens when a merger occurs between two companies of different size?" Excellent question - actually two good questions. When companies merge, their assets are generally combined (i.e. "consolidated") into one balance sheet (in principle, just added together) and one new legal entity under a new name is formed. But, what about ownership? How are the shareholders of each predecessor company treated? i.e. for each share you held in Company A or Company B, how many shares will you hold in the new entity? Well, this depends on the relative values of the two firms. If they are equal in value, for example, then each shareholder would end up with one share in the new entity (but there'd be twice as many shares). In a case like this, goodwill can be eliminated. However, if one entity pays a premium (i.e. the excess of the market price paid over the book value) and issues shares in consideration, some goodwill figure will arise which must at some point in time be written off.
Additional Note re Goodwill: Suppose you acquire a company for $10 million. You paid this because it is what was negotiated and you believe that the acquisition will add considerably to future profits. However, the book value of this business may be much less, say only $1 million. The book value is just the net worth of the company based on its balance sheet, i.e. its assets which are valued at the lesser of cost or market minus its liabilities. In essence, you paid $9 million dollars over and above the real tangible net worth of the company. How do you record this on the balance sheet? You could show the $9 million as "goodwill", an intangible asset. This goodwill inflates the balance sheet and is generally not viewed favorably by bankers or investors. The way to get rid of it is to write it off, i.e. expense it by taking a charge against profits. Unfortunately, this reduces profits and makes corporate performance look worse. That is why this is often referred to as a special "charge" or extraordinary expense. Companies sometimes procrastinate on taking such write-offs. They have a choice, depending on the type of asset, of time period over which the write-off can occur. In some cases a 40 year amortization is permitted under generally accepted accounting principles (GAAP).
Class #8, 29Oct98: MAI, ECU, Global Tech Areas, Mezzanine Financing
Questions where raised regarding MAI (Multilateral Agreement on Investment). Please check the OECD website for some reference material on this subject. The international business community wants and needs a strong framework of rules to give companies of all sizes greater confidence to invest and operate in foreign markets. The MAI negotiations at the OECD offer the best opportunity to achieve such an agreement in the near term. Do you think this has an impact on high tech business development?
One student asked about the effect of the new ECU (European Currency Unit) on high tech business. That's an interesting question. Most high tech trade is done in US dollars and it is unlikely that the ECU will have much of an impact on Canadian or US companies. For those firms based in Europe, I expect that a unified currency will make life a little easier. If any has any thoughts on this, I'd like to hear them.
Which countries are hot spots for technology development? Some countries, notably some of the Tigers like S.Korea, Taiwan, and Singapore (and more recently countries like Malaysia) have made it a priority on their national agendas to promote high tech business development. S.Korea started this in the 70's and look where it is today!! It seems like most countries (including us) see the importance of being competitive on the knowledge based arena. We're trading expertise - not just commodities anymore. Countries that fall behind will become backwaters (or tourist destinations). Comments and observations welcome!
The term mezzanine financing came up in Ross Mitchell's talk. Fairly mature private companies often turn to mezzanine lenders. Mezzanine lenders have plenty of capital available for investment these days, much like venture capital firms. The difference is that mezzanine financing terms generally are far more advantageous and less restrictive than those a venture capital firm would offer. But not every company is suitable for mezzanine financing. Mezzanine financing is a hybrid of subordinate debt and equity that bridges the gap between what traditional lenders are willing to provide and the company's long-term capital needs. In return for more lenient lending criteria and less stringent loan covenants, mezzanine lenders are rewarded with interest income, paid regularly over the term of the loan, that is generally from 5- to 7 percent above the rate on 10-year Treasuries. In addition, the mezzanine lender receives an "equity kicker," usually in the form of warrants for common stock executable upon maturity of the loan.
Class #9, 5Nov98: Receivership & Creditors
During Roy Trivett's talk, the topic of liquidation and "pecking order" came up. Trade creditors often take big risks and are left holding the back. This is also an area where a great deal of fraud is committed - i.e. buying goods on credit through a company and then folding the company. However, it is recognized that there are great risks in business and companies usually factor in an allowance for bad receivables.
Class #10, 12Nov98: Negative P/E, Due Diligence on Employers, Multinationals, tax treaties, IPO:Pricing and trading
Fai Ko was wondering what it means when P/E ratio is reported as N/A? This is because the P/E ratio is negative due to a loss being reported (instead of earnings). P/E ratio can never be negative and there's no such thing as an L/E Ratio.
Here is an interesting email which was recently received from Bill Boora: "I was a student in your Ensc 300 class last year, September 1997. Although I am not attending your class this semester, I still periodically look at the "Business Basics for Engineers" website which you have set up. I have a question which I am hoping that you may be able to answer for me (and it may even be of use to some/most of the students in the Ensc 300 class this semester). I am on the verge of graduating (hoping to be all finished by December). I have begun looking for and applying for full time work at various hi-tech companies, both in Canada and in the US. I was wondering if you would be able to recommend to us some of the things that we should be looking for when researching the companies which we are applying to. I know that the balance sheet and other financial details of the company are important, but are there other things we should be looking into? With the recent stock market instability, are stock options and "free" stocks with full-time employment really as important as they once were?" and here is my response: This is a great question. I call this doing due diligence on employers (i.e. checking them out). To begin, you have to ask yourself the following questions: 1.What do I want to get out of a job? e.g. experience (tech or management?) vs pay (salary, options, etc. Stock options can provide a major benefit - but make sure they have a long fuse on them and don't depend on them. Don't worry about short term fluctuations and don't watch the stock price every hour or day. Regard them as a bonus.) 2.Location factors (does location matter? Surf and sun may go well with a hot startup in San Jose) 3.Size of company (small startup vs established company), 4.People (is there a fit? What are their goals? Do they align with yours?). This will allow you to narrow down your choices. Then, you should take a look at their financials and, if possible, their business plan (no harm asking them for this - they should respect you for asking. If they are hesitant, think again!). Even if the performance or the balance sheet is weak, that may be OK (at least you won't be surprised). After all, you're young and don't need to worry about "job security" (if there still is such a thing). More importantly, check out the people - what are their track records? Have they done this before? Bottom Line - define what is important for you and align your goals with those of the company's. That's they key to fostering a win-win situation. Finally, push yourself. You're only young once. Don't short-change yourself by not taking a chance. Experience on your resume will always be an asset for you that you can draw on in the future. As for checking out local opportunities, don't forget to look at http://www.bctechnology.com.
Many companies have offices and branches (and shareholders) in several countries. These are referred to as multinationals. Often, companies set up elaborate international corporate structures to minimize their worldwide taxes. Because of the tax treaties which Canada has (or may not have) with various companies, it is possible for a company to set up systems and transfer prices so that it reports most of its profits in countries where tax levels are lower. There are many legitimate strategies for doing this type of "planning".
Some students were wondering about the relationship between EarthWeb's Actual offer price of $14.00, and their First day open price of $40.00. Please explain. When an IPO is done, an underwriter (i.e. broker) negotiates the price with the company. The brokers clients get the shares at $14.00. However, as soon as the shares are listed for trading on an exchange, basic supply-demand factors set in. If no one who bought at $14 wants to sell, the price keeps getting bid up until someone decides to sell - i.e. a nice $26 quick flip profit! In this case, there were also only about 2 million shares being offered - which is not many for a big American appetite! In this case, I would argue that the Company got short changed. The buyers and the brokers made more (per share) than the company! But, then again, that's how brokers play the game.
Class #11, 19Nov98: After Hours Trading, Tech Book Reviews
Kevin asks: "Can you explain what "after-hours trading" is? Who can do
it, how is it done, and why is it done?" Stock markets have normal business hours
(e.g. Vancouver is from :30am to 1:30pm). After Hours Trading refers to off-market
trading.
it can be handled by brokers for clients who simply can't wait!
A colleague, Reg Nordman comments on the following tech books he's read recently: I can
not say enough about the book Unleashing the Killer App by Larry Downes and Chunka
Mui ISBN 0-87584-801-X Harvard Business School Press (Chapters and Duthies) They
combine Moores Law, Metcalfs LAw and Ronald Coases' Law of the Firm.
Moores and Metcalfs Laws combine to reduce the cost of transactions. Coase observed that
firms got bigger to reduce transaction costs. What is the impact on a firm if the
market is able to adapt faster to change than the firm? What is the impact on firms
when the costs of transactions are driven toward zero? This is way more than a
product managers book. I believe
this could be the impact book of 1998. Just full of business opportunities from real
estate to construction!
Just finished The Silicon Valley Way...Elton B Sherwin ISBN 0-7615-1272-1 Thin book all about getting funding ...but a good primer on plans and presentations.
"Best" most efficient guide to Powerpoint presentations is Microsoft
Powerpoint by PC Novice Learning Series...$6.95 softcover (looks like a magazine) at
London Drugs, Chapters etc. All the how tos on using the ap, plus good ways to jazz
up with animations, video and music..without loading up the hard drive! We should
no longer have to suffer through boring
presentations!
Class#2 6May99: Prospectus (no prosp?), IPO, Underwriting, Internet Stock Prices, Share Classes, Splits.
A prospectus is a formal, legal document in which a company tells all to the public. It is a formal disclosure document about the past, present, and future plans of the company. It is used when raising maoney from the public to make sure that investors fully understand what they are investing in (securities commissions regulate this to ensure that the public interest is protected). If a company makes misleading statements, investors can seek recourse (through litigation). An Initial Public Offering (IPO) is a company's offering of newly issued shares from treasury to the general public. It is generally the first time that a company does so - making the transition from being a closed-door privately operated company (CCPC - Canadian Controlled Private Corp) to being a publicly traded, highly visible, entity. When doing an IPO, an underwriter, i.e. a stockbroker firm, handles the distribution of shares to the public. Effectively, the brokerage firm subscribes (underwrites) for the shares and then sells them to its clients (investors).
Why are internet stock prices so high? Because demand is very high and it would appear that the supply of internet shares is well below the market's love affair with the internet's potential.
A company's ownership can be represented by various share classes, e.g. Class A, B, etc, Preferred shares, Cumulative Preferreds, Series A...B..etc, etc. Each class has defined rights and privileges associated with it. This can get complex and many companies are getting away from having too many different classes. Suffice it to say that "common shares" define the ownership and it is these common shares that we generally see traded and listed in the newspapers' stock market lists.
A company can split its shares, i.e. issue 2 for 1 or 3 for 1 new shares for each old share. Companies do this when share prices appear too high for the average investor. It also increases the "float", i.e. number of shares in the market, allowing for more liquidity in the market (less easy to corner or control a market). Sometimes companies also do a reverse split, or consolidation of shares. This is less common. It happens if a company has too high a float and/or too low a price. This may be important to a company if it is trying to raise more capital and does not want to appear to be a "penny" stock.
Class#3 11May99: Stock Options, Stock Returns (& investing basics), Oversubscription (Sierra Wireless), Stock Indices (e.g. DOW), Short Sales
Stock Options give employees of companies the right to buy shares at a certain price (usually the trading price on the date granted) for a certain period of time. If the shares increase, then a handsome profit can be realized at no risk by selling shares at current market prices while at the same time buying shares at below market prices. What are returns on stock purchases? Well, these can be very high. But, over long periods of time, returns are more modest. Generally, double-digit returns are expected. An oversubscription of shares on an IPO means that there was much more demand than supply of shares on an initial offering. Stock Indices like the DOW or the SP500 or the T-Net20 are designed to track a particular, defined market - e.g. top blue chip companies, broad market, or a specific group like the 20 most valuable BC tech companies. Instead of following specific stocks, this let's us see how "the market" is performing - like a weighted price average. Short Sales entail the sale of shares which one does not own. It is perfectly legal and legitimate for me to short 1000 shares of Newbridge. This means that I am selling stock I don't own because I think the price will go down. When the price does go down, I buy the shares thereby closing out my short position. This may be risky, because if the shares rise in price, I may still have to buy them at a higher price in which case I lose money. Brokers can handle short sales by "borrowing" shares from their clients' inventories.
Class#4 13May99: Star Wars "Marketing", Reflation?
(Skip these - not much discussion)
Class#5 18May99: Gold Bullion, Class Action Lawsuits, "Securitization", Brain Drain, Tax Breaks (e.g. on Options), Angel Investors, ESA
Gold bullion used to be used as a standard of exchange - considered intrinsically valuable and better than a currency like the US dollar. In fact, currencies used to be represented by gold reserves. This is no longer the case and although gold is still valued by many in preference to a "piece of paper" - especially in times of crisis - its main uses today are in jewellry and industrial applications (electronics), etc. Class Action Lawsuits are law suits launched by lawyers on behalf of a "class" of litigants - i.e. a group which is adversely affected. Lawyers generally do this by charging exhorbitant contingency fees (like 30-50% of any settlements) and they only need one legitimate complainant to proceed. Now you know why they are so popular. Securitization is simply the process of pledging securities against debt. Brain Drain refers to the flight of professionals out of Canada due to our high taxes and lower salaries. But, is it a true statement? Sure, there is always some mobility in a work force - but is there a net outflow? Tax Breaks are advocated by the high tech industry - especially on stock options - as one way to help stem the brain drain. Angel investors are successful entrepreneurs who are willing to invest some of their gains in new ventures. The ESA - Employment Standards Act is the provincial legislation which "protects" workers from abuse by employers. The high tech industry recently got some amendments to this act in order to accommodate the unorthodox nature of high tech employees who like to work late nights and weekends, for example - without penalizing the employer.
Class#6 20May99: Poison Pill (Hostile Takeover), Bay Street, ESOP, Creo IPO, SEDAR
A Poison Pill is generally a right (e.g. the right to buy more shares) given to shareholders of a company so that if their company is the subject of a takeover attempt, those attempting the take-over may be faced with having to deal with such rights, making it more attractive to the shareholders and more onerous for the buyers. Poison Pills are often used when one company tries to buy another in a hostile takeover attempt -i.e. one which is not welcomed by the company. Bay Street is to Toronto as Wall Street is to New York as Howe Street is to Vancouver - i.e. where the exchanges are (or used to be) located. An ESOP is an Employee Share Ownership Plan - designed to encourage employee investment in a company. CREO Products Inc., a BC company is planning an initial public offering of its shares. Check the SEDAR website for details.While at the website - find out what SEDAR is all about and how it has become the Canadian depository for public corporate records.
Class#7 25May99: Inflation/Interest/Exchange Rates, Federal Debt/Deficit, Flat-Tax proposals
Governments try to keep inflation (price increases for a given basket of goods) to within a 1-3% range (annual) in order to keep an economy stable and growing. If the inflation rate starts to increase, interest rates are usually raised. This action reduces borrowing (because borrowing costs increase) and hence demand for products decreases, keeping prices in line. As interest rates increase, foreign investment in Canada (e.g. bonds) becomes more attractive, raising the demand for Canadian dollars which in turn increases the value of the Canadian dollar. Bond prices are are used by the market as a proxy for interest rates. Bond prices decrease as interest rates rise (i.e. to get a higher return on a bond paying a fixed rate, its price would have to decrease). Since higher interest rates make it more difficult for the government to service its massive debt, the use of interest to control inflation is not a simple decision. Also, as interest rates rise - or if people anticipate that they might rise, stock prices generally fall. This is for two reasons - investors move their money out of stocks and into bonds and because corporate financing costs will increase (due to higher interest rates), thereby reducing corporate profits (and revenues too, as consumers ease off on purchases) which in turn reduces corporate valuations. Sounds like the circle of life, doesn't it?
The Federal debt which has accumulated over almost 30 years now stands at $580 Bn. Imagine the interest charges on that. For a view of the budget - showing program spending vs interest costs in relation to total revenue check the Finance Dept's website. The Federal Government's Budget Chartbook contains a useful discussion of economic matters such as those discussed above.
Class#8 27May99: Bankruptcy Protection, Insider Trading, RTO
When companies become insolvent (i.e. they can't pay their bills), they can obtain court-ordered protection from bankruptcy meaning that creditors cannot put the company out of business - giving it some time to come up with a plan of business for its survival. Insider trading is the trading of shares in a company by an insider - i.e. a senior manager, director, or person who owns more than 10% of the shares of a company. Insider trading is not illegal. But, if insiders trade on material privileged information - before it becomes known to the general public - that is a problem! An RTO (Reverse Takeover) is another way for a company to go public. In essence, an inactive publicly listed shell company takes over a private company by issuing shares (instead of cash) to the shareholders of the private company. The number of shares issued is usually very large (5 to 10 times) the number of shares already issued. Hence, the new shareholders now effectively control the public company.
Class#9 1Jun99: RESP, Basis Points, GDP
RESPs are Registered Education Savings Plans - they are not as generous as RRSPs, but they do offer incentives for investing in (i.e. saving up for) education. There is lots of info available on these. A Basis Point refers to one-one hundredth of a unit, such as interest rates or exchange rates. The BC Government has a good explanation for GDP and other terms on its webiste at http://www.bcstats.gov.bc.ca/DATA/BUS_STAT/bcea/bcea_faq.htm#Q2.
Class #10 3Jun99: (no discussion)
Class #11 8 Jun99: Business Models
Students were encouraged to read the Brent Holliday article on T-net (re Business Models)
Class #12 10Jun99: BONDs and Interest Rates
Bonds are issued by credit-worthy governments and corporations as a "debt security" to raise capital. i.e. unlike equity, debt has to be repaid by the borrower at a given rate of interest. Bonds are usually issued for a relatively long term, e.g. 10 to 20 years. They allow lenders to lock in a fixed rate for a long period of time and they allow borrowers to count on a given "cost of capital", i.e. fixed interest rate for the term of the bond. Much of our governments' debt is being carried by bonds issued to citizens, institutions, and foreign investors. A bond usually has a face value (say $100 denomination) and carries a "coupon" of a fixed rate. So, a Canada 10-year 8% bond will pay a coupon of $8.00 per year to the holder of the bond for the term of the bond (at the end of the term, the bond is repaid at the face value). Bonds trade in the market (like equities) and their prices fluctuate in accordance with the market's views on interest rates. If interest rates are rising, bond prices must drop. For example, if you buy the above-mentioned bond for $95 (instead of $100), you will earn $8.00 per year on $95, effectively increasing the bond's interest rate above 8%. At maturity, you also get the full value redeemed (i.e. the $100) which has to be factored into your rate of return calculation. Interest rates can't be bought and sold - but bonds can. As such, they are a proxy for market demand for interest rates.
Class #13 15 Jun99: Young Entrepreneur's Advantage
Young entrepeneurs (e.g. students) often wonder how they can get funding for an idea. It isn't that difficult! They have a few attributes which readily attract willing mentors (i.e. coaches). These are their enthusiam, energy, naievity, and wit. Also, they generally have little to risk or lose and they aren't encumbered by a lot of baggage. They also learn quickly. In short, it's fun to work with them.
Class #14 17 Jun99: Market Cap, Earnings (Loss) per Share, P/E, Diluted EPS, Dividends, Interlistings, OTC Markets
Market Capitalization (market cap) is a measure of the market value of the company, i.e. it is the current share price times the number of issued shares. If you were to buy 100% of all of the company's shares at current market price, this is what the company would cost you. Of course, you couldn't actually do this. You'd likely have to pay more (know why?)
A company's earnings (or losses) are usually reported in total as well as on a per share basis. This allows investors to easily see how the company is performing with respect to their investment. The Price/Earnings (P/E) ratio compares the current share price to the trailing 12-months' earnings and is a useful way to compare various companies and industry sectors. For example, a company earning $.50 per share (last year) which is trading at $10.00 per share has a P/E of 20. If you buy a share today, and the performance stays the same, you can expect to earn $.50 on each share you own. High P/E's are common in high tech because of the rapid growth anticipated in future earnings. Technology company P/E's are generally in the 30+ range. Note that tech companies rarely pay dividends, i.e. pay a portion of the profits to shareholders. They usually reinvest the cash to make the company more valuable - meaning that the share price will go up. The shareholder still owns the profit (or loss), but doesn't get it in her hands. If there is a loss, shareholders share that loss, too (in terms of value), but they do not, of course, have to personally make up that loss and they are not liable for it. If there are stock options or warrants outstanding, then there will be more shares among which earnings have to be divided. The term diluted EPS is used to include such additional shares.
Sometimes companies are listed on more than one stock exchange (e.g. TSE and NASDAQ). This is referred to as an interlisting. Investors can trade the shares on any exchange on which a company is listed. Each stock exchange sets its listing standards (or criteria) - hence indicating to investors that companies have to met certain standards in order to have the privilege of a listing. The criteria for listing on the TSE are higher than those for listing on the VSE. That makes sense because the VSE caters to junior companies. Investors know that, in general, a VSE company is likely to be smaller and riskier than a TSE company. Companies may choose to be interlisted in order to gain broader market access (e.g. the USA via NASDAQ). An OTC (Over-the-Counter) company does not trade on an exchange, although it does trade on a market maintained by brokers. There are no listing standards for OTC companies and hence they are considered more risky and more volatile (there are fewer rules and regulations). Lots of scams occur on the OTC markets! Read Mike's articles on this subject on T-Net at http://www.bctechnology.com. In the USA, the most common OTC market is the OTC-BB (i.e. OTC Bulletin Board) market (see http://www.otcbb.com) and in Canada it is the CDN (Canadian Dealing Network) market - see the Globe for prices.
Class #16 24Jun99: Triple Witching Hour
On the third Friday of each quarter (Mar,Jun,Sep,Dec), a number of financial "derivatives", i.e. options, futures, and options on futures all expire at the same time. This can temporarily affect market prices as contracts are settled and liquidated (or exercised).
Class #17 28Jun99: Bills' Tax Bill, Machine Invasion, homefair.com, Escrow release
When our pal Bill is reported to have increased his net worth by some $billions, that does not mean that he has any tax liability - UNTIL he sells any of his shares! So, if he sold his stake in Microsoft today, yes - he'd be a little poorer because IRS will likely take some 30 to 40% of his gains.
So Takei raises an interesting point about the invasion of machines in our human interactions. Indeed, it is too easy for companies to be just "machines" and forget the human element. This is always a challenge in our increasing technologically dependent society! Those that can use machines and retain the human element will be the winners.
Thanks to Jeff for pointing out homefair.com - check it to compare various locales if you're thinking of taking a new job out of town!
If you read something about "escrow" - this means that something like shares or cash are held temporarily in trust (eg by a lawyer) until certain conditions are met. For example, founders shares may be held in "escrow" and released at regular intervals to the shareholders (based on time and/or performance). Or, cash raised in an offering may be held in escrow until all documents are appropriately delivered and executed.
Class #18 6July99: Tax Treaties, Warrants, Stock Index (T-Net)
Companies that operate (or incorporate) in various countries around the world can benefit from different tax rates in their operating jurisdictions due to tax treaties that exist between many countries. For example, a Canadian company which sells a lot of its products in the USA and Europe could set up a company in the US and a company in England. These companies could be wholly owned by a company incorporated in a low-tax country (like the Dutch Antilles) which in turn is owned by the Canadian company. Profits can be shifted (figure out how!) to low tax countries and then transferred back to Canada on an already-taxed basis, thereby escaping higher Canadian taxes, due to tax treaties which prevent the double taxation of profits (similar to an American working in Canada, for example). Neat eh? Most corporations will structure their affairs in such a manner.
Warrants are, in principle, like stock options. They give the holder the right to buy shares at a given price for a specified period of time. Warrants are usually issued by a company as an additional financing bonus. For example, investors buying shares at $5.00, may be given a warrant (or half a warrant) to buy a share at $5.00 (or slightly) higher for a year or two. If the stock performs, then investors get a double benefit.
A Stock Index, like the DOW, TSE300, or our very own T-Net20 measure the performance of a "basket" of shares usually representing a "market". e.g. the DOW represents the best of corporate America, the TSE300 represents the broader Toronto market, whereas the T-Net20 represents the Top BC tech companies. Indexes give you a "sense" of how any given market is performing. The T-Net, which was pegged at 1000 in Jan'98 is now in the 2100 range. Some indexes are price weighted and some are value weighted. The T-Net, a market cap weighted index, gives a true representation of what would happen to an investment in that market. In other words, $1000 invested in Jan'98 would return $2100 today.
Class #19 8July99: Director's liability, Hedge Funds, Derivatives, Fiscal Year End
Directors are the soul of a company and are liable for its actions. Directors are often sued by customers, shareholders, and others. And, they are the ones that personally have taxation and payroll liabilities. Sometimes directors are not sued because of the high legal costs (hence class action suits).
Hedge Funds are high return high risk funds which invest in exotic products like derivatives. The name comes from the fact that they may be used as a "hedge" (i.e. safeguard) against some event - like buying OJ futures as a hedge against inclement weather.
A derivative is a contrived financial instrument which is derived from some underlying real asset - like shares or a commodity. For example, a stock option is a derivative product which represents a real asset, i.e. company shares. A pork bellies futures contract is a financial hedging instrument which represents a real commodity - bacon! Derivatives are created and trade in a market mainly to provide a means of risk managing (or speculation to others!).
Companies can arbitrarily define their fiscal year (financial or taxation year) as any 12-month period - not necessarily tied in to the calendar year. This may help companies with respect to tax planning and business cycles. For example, a business which is slow in the fall (like a Ski Resort) could select June 30 as a year end - so that the accounting and auditing can occur at a time which is not too busy. Do you know where the word "fiscal" comes from?
Class #21 15July99: trading halts, write-down, charge against earnings, goodwill from acquisitions, carrying value of capitalized development, and restructuring costs, index trading
Sometimes a stock exchange or a company will halt a stock from trading (ie. trading halt) if some important news is pending. This gives the market a "breather" and allow for a fairer market - avoiding speculative (or uninformed) trading. Exchanges, by the way, are often referred to a "Self Regulating Organizations" (SROs) because the impose their own regulations. Note that Exchanges are not government institutions - they are private companies owned by their members.
Companies occassionally have to take extraordinary charges, i.e. profits or losses, which occur outside of their normal daily business activities. For example, a company may report a profit to due an investment or asset which appreciates substantially. Or, if an asset drops in value, the company may be forced to "write it off" the balance sheet. When an asset is written off (or reduced in value) this reduction has to show up as a charge against earnings. If a company buys some intellectual property (e.g. software) for $1 million and puts this on its balance sheet as an asset, but then finds out late that the software is useless, it would have to take a $1 million charge against profits (i.e. reducing retained earnings on the balance sheet). This can happen in all kinds of situations - e.g. goodwill arising from the purchase of a business, reduction of a capitalized development, etc. Another type of charge against earnings arises from a corporate restructuring, i.e. laying off employees (and having to pay substantial severance and accrued benefits).
Stock indexes can be traded on the market. The most common way of doing this is with a derivative product on the futures exchange, like the S&P index futures contracts. There are even options on these. These instruments are attractive to the short term, speculative trader. Also, there are mutual funds whcih are designed to consist of the same stocks as in an index. For broader indexes which comprise 100+ stocks, it would be difficult for an investor to manage his own portfolio - hence the value of a fund.
Class #22 20July99: S&P500, Liquidity, Overallotments, 2-minute portfolio, pooling of interest
The S&P (Standard & Poor's) 500 index is a broad market index comprising 500 stocks. As such it is a much broader measure of market activity than is a narrow high end index like the DOW (which is based on 30 blue-chips).
Liquidity is a term which refers to the volume of trading in a market. In mature US markets, trading of shares is in the millions (daily) whereas the microcap companies listed on the VSE, for example, are lucky to be trading more than a few thousand shares per day. In an illiquid market, pricing is usually not "fair". It is difficult to buy or sell share blocks without moving the market in the process. Selling a block of 10K shares can cause a stock's price to drop by 20% or more!
An overallotment may occur in an underwriting in which a broker has allocated more shares to his clients based on strong demand for an offering. Usually a broker has a "greenshoe" or option to subscribe for extra shares to take care of such demand.
The 2-minute portfolio is a an approach whereby an investor can assemble her own portfolio of stocks. In this case, the Globe and Mail suggests that one buy the largest (by market cap) company in each of the 14 TSE industry groupings. It is a 2-minute portfolio because it doesn't take longer than that to figure out what to buy! These portfolios provide both diversification and strength.
In today's guest talk by Ross Mitchell, founder of HotHaus, he referred to the acquisition of HotHaus by Broadcom as a "pooling of interest". This is an accounting term which allows businesses to merge together and combine their balance sheets based on their historic costs as oppsed to the alternative method - purchase accounting - which means the recording of substantial goodwill on the balance sheet which must be written off against earnings over time. The interested student is directed to a recent article in CFO Net. Note the comment that this method of accounting has given rise to higher valuations!
Class #23 22July99: HotHaus Takeover, Trade Surplus, Liquidation or Breakup Value
In the HotHaus takeover, $280M US is being "paid" by Broadcom to acquire 100% of the shares of HotHaus. In essence, HotHaus shareholders are swapping all of their shares for a "small" number of Broadcom shares making them all "small" shareholders of Broadcom. Broadcom then owns 100% of HotHaus. The shares issued to the HotHaus shareholders have a market value of $280M. That is why it appears that $280M has been paid (in essence, it has!).
A trade surplus means that a country is a net exporter. This would make its currency stronger in international markets and it means that we are, effectively, producers instead of just consumers. This is good because it creates jobs, makes us competitive internationally, generating wealth for our citizens (on a relative basis).
Sometimes a company's assets less its liabilites, i.e. breakup value, are worth more than a company's market cap (as illustrated in the movie, "Other People's Money"), e.g. the equipment, land, buidlings, etc may be worth more than the market value of a company which could, regardless of its future prospects, make it intrinsically valuable. At the AGM in the film, the Chairman made an interesting comment, "surely a company is worth more than the value of its stock!". Ironically, we're seeing just the opposite in certain sectors (internet stocks) where the value is (arguably) far ahead of the intrinsic value!
Class #24 27July99: Sunset Companies
As noted above, some companies are in sunset industries (fading out) and, unlike up and coming tech companies, their net asset values may be higher than their market values. Why? Because no one is interested in buying into a future which isn't bright. However, many such companies have accumulated property over time which has appreciated substantially over time (such assets are recorded at "cost" - not market value - on the balance sheet). Hence, a "fire sale" may produce more cash than what the company appears to be worth! Hence, market players (like Larry the Liquidator) can take advantage of such opportunities by taking over a company at a low price and dismantling it, and selling off the pieces for a profit (or even revitalizing some parts of it!).
Class#1 8Sep99: IPO, Incorporation, GDP
Today we briefly talked about and defined IPO - Initial public offering, the process of incorporation, and the general meaning of GDP (Gross Domestic Product).
Class#2 15Sep99: Derivatives, VSE, Onex, "Points", DOW Index, Fully Diluted Shares
Amy Lu asked about the impact of the CDNX and the meaning of the term "derivatives" as it relates to securities. Tom asked about the VSE's bad reputation and if the CDNX will fix this negative perception. Bryan asked about Onex and why it is courting Air Canada (it's all part of an M&A game that execs love to play!). Scott was curious about the term "points" as used in various market quotations. Think of it as the smallest increment in a traded item (e.g. .01% in interest rates, pennies in shares, and simply units in indexes). Sean asked about the DOW and indexes in general. Think of these as a particular type or class of market aggregation (e.g. like a market average). Kim read about (in the Geac context) earnings per share vs "fully diluted earnings" per share. Fully diluted means all shares - including un-issued shares like shares under option. See Glossary for more info on these terms.
Class#3 22Sep99: Book Value, Insider Trading (& Info), Share Classes, Blue Chip, NDA, Stock Price, P/E ratio, Float, Market Cap, Stock Splits and as discussed in class: control, proxy, quorum, and warrants.
Thanks to Gary Wong, Greg Hall and Kim Zipursky, Scott Kulchycki, Shane Schneider, Fred Ghahramani, Amy Lu, Kevin Ko, and Brad Oldham for inquiring about these terms for which you can find definitions in the Glossary. And thanks to Tom Halford, James Balfour, Sean Shieh, and Phebe Jaggernauth for their questions, all of which you will find on the CONFERENCE.
Insider trading (e.g. check today's RoB p17 and on-line sources) is always a hot topic. Why?
A fundamental question in business is "what's it worth"? Book Value, Stock Price, P/E ratio, Market Cap are all terms that deal with this question in one way or another. Think of a business as a money machine. In the simplest view, a certain amount of money goes in (investment) and certain amounts come out (returns). It is these returns that ultimately determine value. "Discounted Cash Flow" calculations allow one to determine a range of values. It is the unknown future and dreams of stellar growth and profits that results in what may appear to be very generous valuations. We'll discuss this in today's class.
Does market cap truly reflect the value of a company?
In the in-class discussion, some additional topics came up, i.e. what is meant by control, proxy, quorum, and warrants. Thanks for mentioning these. They, too have been added to the glossary.
Class#4 29Sep99: Institutional Investors, Stock Pricing, Minority shareholder rights, Tax Brackets, De-Mutualization, RTO, Short Sale
Michelle asked: What's the difference between non-institutional and institutional investors? Gary got it right when he responded: non-institutional: are individual investors like you and me or anyone that owns shares; institutional: are trust companies, hedging companies, banks, mutal fund companies, etc.
Travis was wondering about the pricing mechanism for a stock, i.e. who sets the price. It is actually an open bidding system where buyers and sellers post their orders. Let's take a look at "market depth" on some local stocks during class.
Shane was wondering about which shares of a company are actually quoted in the papers. These are usually the common shares although sometimes other classes or warrants may also be quoted. By the way, there is no differentiation between "public" or "private" shares, i.e. a companies shares are all privately held or all publicly tradeable. Shares are shares.
Kevin raises the point about what happens to minority shareholders if a company is controlled by a majority shareholder and if it is possible for a public company to go back to being a private company. If you own 51% of a company, you basically control it. But, the other 49% shareholders do have rights - i.e. to participate in profits, dividends, etc. Such companies are often less attractive to minority shareholders unless they like management and are along for the ride. Securities Laws attempt to prevent minority shareholders from getting screwed. To go private, at least 90% of the shareholders have to tender their shares. The remaining 10% would then be forced to go along with the deal and they will be automatically paid out. The company would then become privately held. Jim Pattison did this recently with a company in which he held an interest.
Kevin also wonders what the current Canadian tax brackets are? In Canada, taxation is based on income brackets (or ranges). The Federal tax brackets are (for 1999): $0-$29,590: 17%; $29,590 - $59,180: 26%; $59,180 and over: 29%, Then the Provincial tax is calculated on top of this for a gross (really gross) rate! More details on these taxes can be found at http://www.sfu.ca/~mvolker/vbt-tax-facts.htm. For more info on taxes, try KPMG's tax page at http://www.kpmg.ca/tax/. The taxes are much lower (and the brackets are much broader) in the USA (e.g. check: http://www.looneycpa.com/tax.htm).
He also asks: "If I buy a sports jacket (for example), would I be able to charge that under the justification that I have to dress appropriately to meet clients? What about underwear?" Interesting question! I assume that you are talking about tax deductibility. The answer is maybe. If it fits in the category of a special uniform, then likely. Normal clothing is not deductible.
Amy asks about Life insurance companies and the de-mutualization process. Historically, insurance companies have been "owned" by their policy holders. Recently, many companies have decided to go from having policy stakeholders to having shareholders like most other companies.
A couple of questions were raised in class, i.e. what is a Reverse Take-Over (RTO) and what is a "short" sale? For RTOs, please read my article at http://www.sfu.ca/~mvolker/biz/ipo-rto.htm.
Short selling involves selling shares you don't own. This is a common practice. It
works like an overdraft in an account - except instead of being short on cash you are
short on a particular stock. If the stock drops, you can buy back the shares you have
shorted, thereby making a profit. Instead of buying low and selling high, you are selling
high then buying low!
Class#5 6Oct99: OTC, GIC, Anti-Trust laws, Inflation, Audit, Hedging
Amber was asking about OTC in connection with Stratcomm, a Vancouver company which is
in a bit of hot water and which trades on the OTC market. OTC means
"over-the-counter",i.e. a market where shares can trade without being listed on
a regular Stock Exchange - kind of like an electronic bulletin board. See my recent
columns in T-Net for more
on this....(i.e. http://www.bctechnology.com/statics/mvolker-sept2499.html).See
also the OTC-BB website: http://www.otcbb.com.
Nestor was curious about index-linked GICs. What's a GIC? and how is one index-linked? Here's some info on the subject at: http://www.mordencu.mb.ca/invest/ilgic.html.
Phoebe raises some points regarding the merger of MCI and Sprint, i.e. would this give rise to anti-trust laws being broken. What about anti-trust laws in Canada? Try this website: http://www.mchayden.on.ca/dbic.htm#_Toc443297139.
During class, the concept of "Inflation" was discussed. Inflation is the increase in nominal price of a fixed "basket" of goods with no increase in value, thereby reducing buying power. Governments monitor inflation (e.g. by using a price index) and use interest rates to maintain inflation in a narrow band, say from 1-3% per year.
The interaction between interest rates, currency exchange rates, and inflation factors is complex. However, it is all driven mainly by our economic performance - our production output. If we export heavily, our currency will strengthen because of foreign demand for it to buy our goods. If our currency is strong, there will be no pressure by the Central Bank to increase interest rates (ie. to prop up the currency). But if our growth, i.e. GDP, is too rapid, interest rates will tend to rise (partly precipitated by increased demand for capital) to keep inflation under control. As our output (esp exports) increases, our currency will also strengthen. But then, how far can interest rates and our currency rise? What is our government's fiscal policy? (It is to keep inflation in the 1 to 3 percent range). What is the relationship between Can-US interest rates and Can-US exchange rates? Canadian long-term interest rates should be below US long-term rates because of superior Canadian inflation fundamentals.
Companies hire accountants to perform an "audit" of their financial statements. This means that the accountants perform a very thorough check of a company's affairs to independently verify financial information presented to the shareholders. This prevents management from being "too aggressive" when reporting financial results.
Hedging refers to the use of financial instruments, such as FUTURES contracts, to mitigate risk. i.e. a futures contract can be purchased as a safeguard against an adverse C$ to US$ exchange variance.
Class#6 13Oct99: SRED, National Debt (vs Deficit)
SRED = Scientific Research and Experimental Development tax credit. This is the best funding program offered by the Canadian government to encourage R&D in corporate Canada. All you have to do is follow the rules for the program and you will automatically receive this credit. If you have no taxes owing, you get the credit in cash, i.e. it is called a refundable tax credit. It can add up to 68% of your incremental R&D dollar expenditure (see example). Canada spends almost $1.5 Bn on this program annually! [More info]
Tom has raised an interesting question regarding out national debt. What/why is it? The Federal debt which has accumulated over almost 30 years now stands at $580 Bn. Imagine the interest charges on that! For a view of the budget - showing program spending vs interest costs in relation to total revenue check the Finance Dept's website. The Federal Government's Budget Chartbook contains a useful discussion of economic matters such as those discussed above. And, thanks to Gary and Fred for their opinions on the subject fo debt (see Conference)!
Class#7 20Oct99: Charges, Debt Cancellation, Bankruptcy
Microsoft's numbers are in, but what is meant by one-time charges?
Darren was asking about cancelling debts in the case of me owing Bill $100, Bill owing Tom $100 and Tom owing me $100. Absolutely - no problem - just write cheques or notes to clear it off. Businesses and governments can do the same. In the case of bad debt situations which may lead to bankruptcy, there are other options, e.g. negotiated settlements and/or creditor proposals. e.g. if I owe T-D bank $1 million and my balance sheet sucks, then the T-D might be willing to accept 10 cents on the dollar. In this case, the debt is cleared, I'm not bankrupt and my credit rating is not impaired. (On the other hand, if I go bankrupt, T-D might get nothing - or less than 10 cents per dollar).
Class#8 27Oct99: Due Diligence, Economic Value Added (EVA)
Due Diligence is the process of thoroughly checking out a company (e.g. for investment purposes).
Economic Value Added is a financial performance measure used to evaluate a
company's true profit. EVA is
actually a trademark of Stern Stewart & Co. There is a website dedicated to so-called
EVAnomics at http://www.evanomics.com. EVA is often called Economic Profit (EP) in order
to avoid problems caused by
trademarking. EP has been defined as total net gains less the interest on invested capital
at the current rate, i.e.the idea behind it is that shareholders must earn a return that
compensates for the risk taken. Equity capital has to earn at least same return as
similarly risky investments in equity markets.
btw the 4-page report referred to in the Globe is available at: http://www.Broadgate.com/files/Survey.pdf.
Class#9 3Nov99: Judgement Proof
Individuals can make themselves judgement proof, ie. immune to being sued in the courts because they have no assets (or even negative assets) which can be seized. i.e. if you are sued, and you have no assets, you may never make good on your debts. Any judgements rendered against you may be worthless.
Class#10 10Nov99: Stock Dividend, Internet Bubble
A Stock Dividend occurs when a company creates a spin-off company, e.g. splits into more than one corporation. In this case, each shareholder in the existing company will receive shares in the new company (usually 1 new share for each old one held). This is called a stock dividend. At the moment in time when this occurs both companies have identical shareholder lists. Of course, over time, this will change as people trade thier shares. This allows companies with divergent interests to form new, more focussed, ventures.
When will the Internet Bubble burst? I.e. when will the market realize that most i-net stocks are overpriced? For companies like Yahoo and Amazon to justify their current values, they would have to grow more than 100% per year for the next 5 years (compare to Microsoft and Dell which grew 53% and 60%, respectively, in their first 5 years, post-IPO). And, this is based on using a P/E of 40, a discount rate of 20%, and Profits of only 10-15%!!
Class#11 17Nov99: Corporate Earnings Projections, Foreign Ownership, Forward Contracts
Gary's answer to Amy's question about how analysts arrive at earnings projections is
bang on. He says" Projections are just numbers financial groups make public when they
analyze a company. ...They arrive at their projection by looking at
financial statements, getting market information, market trend, and any other factor that
can affect the company...". With respect to the impact on stock price, though, there
is another factor generally referred to as "buy on rumour, sell on news". Share
prices may rise on earnings expectations and when the earnings are made public, even if
on-the-money, selling (i.e. profit-taking) occurs, putting downward pressure on share
prices.
Andrew has raised the question of foreign ownership of companies in Canada. What are the rules? (He mentions the 10% limit on Air Canada - what does this refer to?) What about ownership vs governance? There are many foreign owned companies which operate in Canada.
Banks offer their clients and instrument which is like a Futures contract - it is called a forward contract which locks in a fixed currency rate for delivery at some future time. These also work very well and many corporations use them. The nice thing about Futures is that they are so easy to use. Even the smallest company (or individual) can readily take advantage.
Class#2 10May00: Bonds & Interest Rates, IPOs, Market Cap
Thanks to questions raised by David Boen raised some questions relating to bonds (see Glossary). Note - Bonds and Bills (short term bonds) are used to determine interest rates. If bonds rise, interest rates are dropping (explain why). What are Junk Bonds? Prashan asked about evaluating tech companies. There are a couple of recent articles in the Globe on this (see rob#1 and rob#2). A few class questions concerned IPOs and their pricing. Market Cap refers to the value of a company based on its current price times the number of shares issued.
Class#3 17May00: Stock Options, GDP, Interest rates and Inflation
Thanks to Rob Huxtable and Kaveh Afshari for asking about stock options and what's happening in the economy, i.e. why the central banks (Can & USA) have jacked up interest rates to keep the economy and inflation under control. You can find lots of information on these topics in the glossary, topics section, and articles on the business web page.
Class#4 24May00: Taxation, Stock Exchanges, NASDAQ, Indexes
Eric Hennessey suggested a brief discussion on taxation - e.g. types of taxes, impact, etc....How much of every revenue dollar goes back into taxes of one form or another? There are many types: income, capital gains, PST, GST, property tax, social taxes, health, and other forms of taxes like unemployment insurance, workers compensation, etc...etc...It adds up pretty fast (I would say 70-80% of every dollar goes into tax!! No wonder its a national sport to beat the taxman (fairly and legally). Last weekend's Globe ran an article on foreign tax havens - for those who are thinking of becoming non-Canadian taxpayers.
We also talked about the different types of markets for trading stocks - stock exchanges, bulletin boards, etc...and the differences between exchanges like the TSE, NASDAQ, and the CDNX... Whay are some of these differences. What's a stock Index? There are many styles and flavors of these, e.g. the DOW, the NASDAQ, the QQQ, the CDNX, the CDNX Tech Index, the TSE300, TSE60, T-Net20, SP500, SP100, etc, etc..... What's it all mean? And, how can you use and interpret these? You can read some of my commentary on the T-Net (bctechnology.com) - in the archives.
Class#5 31May00: Volumes & liquidity, Insider Trading, Dilution (fully diluted), WTO & Free Trade
We talked about the significance of trading volumes - be it applicable to markets (like "the volume today on Nasdaq was....") or individual shares. Volumes are almost as important as prices...it is important to consider these together. Low volumes can create liquidity problems, e.g. it means that it is more difficult to obtain a fair price when buying or selling shares. Small volumes can cause HUGE price movements. Insider trading may be illegal if insiders of a company buy/sell shares on the basis of privileged information. Insiders are those who are directors, officers, senior managers, major shareholders, and possibly others deemed as such. Dilution refers to the issuance of more shares from treasury - thereby diluting other shareholders. Hence, companies sometimes report "fully diluted earnings", i.e. the earnings per share AS IF all shares under option had been exercised. This can be very significant.
Canada's main export is automobiles (no - NOT lumber!). This is due to the autopact (1950's) with the USA that allowed us to build an autombile industry in Canada (Ont & Quebec). Now the World Trade Organization regulates trade among its member countries and it requires Canada to make immediate changes to the autopact and phase it out shortly thereafter. What do you think about this? What do you think about the WTO??
Class#6 7Jun00: Burn Rate, Working Capital, RTO, Stock Splits
For definitions on these items as discussed in class, check the Glossary or search under archived topics.
Class#7 14Jun00: Preferred Shares, Proxy fight
NB - use of this page is being reduced - refer to CONFERENCE for discussion items,
Class #10, 05July00: Derivatives, Splits/Consolidations, High Tech Definition, GST.
Class #13 1Aug01: tba
This is the last class. Fred Ghahramani, our TA will lead the discussion today.
Class #12 25Jul01: Taxation, Professional Advisors
Taxation is a complex matter. Myriad taxes are levied against individuals and corporations. With respect to one's "income", tax categories are VERY important. For example, If I can "earn" $10K by selling stock, or by exercising stock options, I'm much further ahead than by getting a bonus cheque of the same amount from my employer. Income from capital gains (i.e. increase in stock price) is taxed at only HALF the rate at which other income is taxed. Hence, if I'm in the top marginal income tax bracket, on a $10K profit from stock, I'd pay only $2500 in tax. BUT, on $10K of employment income, my tax bill is TWICE that - i.e. $5000!! This is just one reason why corporate ownership can be more rewarding than simply working for a living! To help us manage our personal finances, it is a good idea to engage the services of a professional financial planners and tax experts. You wouldn't go to your uncle Harry for brain surgery (unless he's a surgeon) so why go to a non-pro person for important personal financial help and advice. One of the things I've tried to do in this course is not to "teach" you about these things but, rather, make you aware of them and how complex they can be so that you will explore them on your own as your progress!
Class#11 18Jul01: Stock Exchange
What is a stock exchange and who owns it?
Class#10 11Jul01: Bankruptcy, Creditor Protection, CCRA loses "profit expectation" ruling, Corporate Governance, BC's New Tech Ministry (CSE), Financial Derivatives
Insolvent companies cannot meet their financial obligations, i.e. they have insufficient cash to pay their bills. In this case the company itself - or its creditors - can put the company into bankruptcy. The company can, via a Court application, hold its creditors at bay for a period of time during which it can prepare a proposal for dealing with its creditors. During this time, the company will continue to operate but it cannot get deeper into debt. In a recent court ruling, a lower courts ruling in favor of CCRA was overturned. Basically, CCRA said that an individual involved in a multi-level marketing program had no reasonable expectation of making a profit and hence disallowed all his expense claims. Initially, they won the case, but the higher court said that it was not up to CCRA to assert that there was no profit expectation. Corporate Governance - the running of companies with respect to laws, rules, regulations, ethics etc is becoming more and more an item in the news. In the USA (and now in Canada), lawyers are known to file "class-action suits" on behalf of stakeholders or others against companies which, in turn, keeps them honest and compliant! CSE = Ministry of Competition, Science and Enterprise - interesting new name, eh? Try to familiairize yourself with various government Ministries and how they are organized. You never know how you might need them (remember - they work for us!). A financial derivative is any financial instrument (like a contract, agreement, or right) pertaining to an actual commodity - be it shares, currencies, metals, foods, etc. Examples of derivatives are Futures contracts, Options, and even Options on Futures (sort of a second derivative).
Class#9 4Jul01: Canada ranks #3, Dividends, Bonds, Prospectus (and Red Herring), Iain Black
Canada has dropped from the #1 best place to live to #3 (following Australia and Norway). There are four criteria used to rank countries, one of which is GDP per capita. EMJ Data is one of very few companies in the tech industry (not really a tech company itself) which is paying a whopping Dividend to shareholders. Where does this show up in the financial statements? Note: how is EMJ making its money? Why is it trading so low? Bonds are debt instruments issued by Governments and Corporations. Governments (the safest risk bet) pay interest rates close to current market rates. Corporations (depending on risk rating) pay higher rates. Bonds have a specified face value (eg $100) but trade in the market. Their prices change daily depending on interest rates (and supply/demand) for the stock. Arbitrageurs ensure a price which gives a yield reflecting current interest rates. If interest rates rise, bond prices drop and vice versa. If you bought a Jun2021 9.75% Can Govt Bond for $100, you would receive $9.75/year until 2021 (in 2021 you get $100 back). But today, you can sell (or buy) that bond for $140.92 (giving a yield of 6.16%, i.e. $9.75 on $140.92**). So you'd have made interest while holding it PLUS a 40% Cap Gain! This is why bonds can be HOT (and good) investments. But, what if you buy today at $140 and rates stop decreasing, i.e. start increasing? **Note: Yields are calculated to maturity. Can you explain why $9.75 produces a yield of 6.16% and not a yield of 9.75/140.95=6.96%?? Also, suppose you bought this bond for $100 in Jun1991 and sold it in Jun2001 (today) for $140. What is your effective yield (interest rate return) on your investment? A document called a prospectus was mentioned a few times during class. What is a prospectus? And, what's a Red Herring? (Iain Black mentioned this and Fred alluded to it). Yes, it is also a great business magazine from Silicon Valley. Iain gave a great talk (hope you agree) and pointed out some notable differences between running a private company and running a public company. He made a strong point about the importance of having good communications skill (please take note).
Class#8 27Jun01: Corp R&D spending, Barry Jinks' talk, Bureaucracies, Hierarchy & Efficiency
Ideally, tech companies should spend as much as possible on R&D while still giving a satisfactory return to shareholders. Companies have tended to cut back too much on R&D in order to improve on corporate earnings. While this may look good in the short term, it may be very damaging in the long run. A good strategy for a company is to obsolete its own products - before its competitors do! The top 100 R&D companies in Canada spend 4.4% (avg) of sales on R&D (dangerously low!).
Barry Jinks mentioned that a good way to find and get into an early stage company is by talking to Venture Capitalists. VC's are always looking for good candidates for their portfolio companies. Barry commented on success by noting that a true entrepreneur never really achieves success, i.e. there's always more to accomplish. His three primary success factors: Perseverance, excellence, having fun. He emphasized the value of an engineering degree in business and how an MBA on top of a BASc makes for a potent combo.
Bureaucracies are good. Are you surprised to hear this? That's because what you usually see are poorly functioning ones which frustrate you. How can you organize a large company with many people so that it operates efficiently? A well-designed bureaucracy should help in this regard. Hierarchy (who reports to whom) is very important. If internal communications (for interacting) and responsibilities are clearly defined, companies will run better. "Red tape", like policies and procedures, allow companies to perform their functions more consistently. Think of some work situations you have been involved in and ask yourself how you might improve the situation by changing responsibilities, procedures or reporting lines. Is a "flat" (or horizontal) reporting structure better than a vertical one? Should companies be organized along functional lines or product lines? Have you noticed any differences between government and for-profit organizations with respect to keeping you (as a customer) satisfied?
Class#7 20Jun01: Stock Index, Interlistings, Arbitrage, Guest Speaker (Shaheen Tejani)
What's the DOW? the Nasdaq? SP500? TSE300? T-NET20? etc... A stock index is a way of measuring the performance of a group of companies based on some criteria. What is the value/purpose of an index? How is an index calculated? Can you "buy" an index? Sometimes shares are interlisted, i.e. they trade on different exchanges. When a stock trades on the TSE and on the Nasdaq, you might expect advantages in trading on one market over an other. However, arbitrageurs tend to keep discrepancies to a minimum by taking advantage of small market spreads. How might they do this? Shaheen Tejani gave a stimulating talk about her evolution from engineer/manager to venture capitalists. Unlike many VCs, she's more interested in meeting the Team than in looking at a business plan. What's the elevator pitch that she talked about? Why did Shaheen give out a prize of U$20 in class? What did she emphasize as being a very important and useful habit to develop?
Class#6 13Jun01: IPO, Goodwill
An IPO is an Initial Public Offering of shares by a company to the public. It is also referred to as "going public". It allows companies to raise capital from a large number of investors. It also provides current shareholders with liquidity (i.e. an opportunity to sell some of their shares). Goodwill is one of those soft, intangible items that can appear on a company's balance sheet. It is often the difference between what a company paid for an asset and what that asset is really worth (can you think of an example of this?). What happens to Goodwill?
Class#5 6Jun01: Productivity, Stock Options, Guest Speaker
Please read today's article in the National Post by Luiza Chwialkowska, "The government plans to undertake a four-part productivity program aimed at halting Canada's falling living standards, but has no plan to introduce new tax cuts to speed up the process...etc".
So what are stock options all about? What are incentive stock options? vs trading options. How do they work? For details - check previous "topics" (see link at top) and check the glossary, too.
Today's Guest Speaker: David Marshall <david.marshall@100world.ca>. David began his post-secondary education studying Engineering at LFU in India. After this exciting one year adventure studying abroad David returned to SFU to complete his studies in International Business and Economics. With the traveling itch still prevalent David went on to study Transitional Economics at PBU in Poland, International Business at UAP in Mexico; International Business at SDSU in the United States and International Relations and Economics at the Univesidad de Guadalajara in Mexico. David teamed up with 100word in 1999 to co-found the Canadian Corporation.
Class#4 30May01: Buying a company, Takeover bids, Corporate "currency", Reverse Takeover
We talked about the difference between buying a company (i.e. buying its shares from other shareholders) versus buying the assets owned by a company. We also talked about how companies, individuals, or groups can attempt to get control (via a takeover bid to buy shares from current shareholders) of a company (it can be done for a lot less than 51% of all shares, i.e. it only needs to be a majority of those shares voted in person or by proxy) - i.e. how they do this with proxy votes in order to put in their own board and management (just like in the DeVito movie we're watching). The neat thing about a company buying another company is that its currency need not be cash - it can be its own shares. i.e. instead of paying $100M to takeover 100% of another company, the acquiring company could simply issue 10M shares (if they are trading at $10+) in order to accomplish the same thing. If the acquiring company is very small, or even a "shell" for that matter, it may have to issue so many new shares such that the newly issued shares received by the target company's shareholders effectively give >51% of the control to the new group, effecting what is called a "reverse takeover".
Class#3 23May01: Fed Funds vs Discount Rate, Stock Price, Short Selling, and Liquidity
Sorry about some earlier confusion. The US Federal Reserve Board's "Funds rate" rate and its "Discount rate" are not the same thing. (Before 1997, they used to be the same thing). The Federal Reserve can influence the economy by changing the discount rate or the funds rate. Although those rates are very different, a change in either has the same effect: Increases slow the economy and prevent inflation; decreases spur economic growth. The discount rate is the rate at which the Fed lends to banks. The funds rate works differently. Banks do not earn any interest on the money they are required to have on deposit with the Federal Reserve. When reserves climb above the minimums required, banks gladly loan out that excess to other banks that need to add money to their reserves. The lending banks charge interest for this service. The rate of interest they charge is known as the "federal funds rate," or funds rate. This rate jumps around all the time. The Federal Reserve sets the base or benchmark rate that banks charge. Currently the funds rate is 50 basis points higher than the discount rate.
A company's stock price is determined primarily by both the demand for a stock and the supply, i.e. if a company has relatively few shares issued and a small number of shareholders, it does not take a huge demand to move share price. However, a company with a large "float", may not see as much "volatility" as demand increases or decreases. Share prices for very small cap companies can, therefore, be easily manipulated.
Believe it or not, you can actually sell shares in a company which you don't own. This is referred to as Shorting a stock. Electrical engineers love this concept! When you short a stock, you sell it with the expectation that you can later buy it back at a lower price and pocket the difference. Many investors and speculators will do this with shares in companies which they believe are over-valued. Perhaps new technology hype might put a trading value on a stock which is seen to be totally unreasonable. In such a case, an investor might short the stock in anticipation that the market will eventually wake up and realize that the stock price is inflated. So, how do you short? You can short a stock by simply telling your broker to sell it short. This means that the broker will enter a trade for your account (you usually have to put up the full dollar amount of such a trade). In so doing, the broker effectively borrows the stock which he sold from other accounts. If the stock goes up in price, you will be asked to provide additional "margin". If you buy it back at higher prices, you take a loss. If you buy it back as it drops in price, you take a profit. Shorting is a fun game. It also provides some market stability insofar as it prevents stock from rising beyond a "reasonable" price. Because shares can only drop to zero but rise to infinity, shorting is a risky business with a limited upside profit potential. A less risky way to short a stock would be to buy PUT options (see options.)
Liquidity, in reference to stock trading, refers to the daily trading volumes. A company which trades heavily (i.e. 100K shares+ per day) is very liquid, i.e. there are many buyers and sellers in the market at any one time. A company which trades thinly, say only a few thousand shares per day does not give buyers and sellers sufficient liquidity to ensure a fair price.
Class#2 16May01 (BC ELECTION DAY): Vote today! Prime rate and bank rates, voting - politically and corporately
Political voting bears many resemblances to corporate voting. How does voting work? In the case of corporations, what are shareholders voting for? What are some of the ground rules? Shareholders elect the directors of a corporation annually. The directors are the soul and conscience of a company and in being directors, they take on huge personal liability risks. The directors, other than the CEO, are NOT employees of the company. For more information on Boards, click here. We also talked about Proxies and what they are (see glossary).
We also had some discussion on government debt and the huge financial burden caused by interest payments on this debt. The Federal debt which has accumulated over almost 30 years now stands at $580 Bn. Federal tax revenues are around $160Bn of which one-quarter goes just to service the debt! Compare that to Canada's total GDP of $800Bn! Imagine the interest charges on that. For a view of the budget - showing program spending vs interest costs in relation to total revenue check the Finance Dept's website. More information on the Federal Government's Budget can be found at http://www.fin.gc.ca/access/budinfoe.html.
Interest rates - the central bank rates in the U.S. (i.e. the "discount rate") and Canada determine commercial bank rates. The Prime rate is the "best" rate charged by commercial banks to their best customers. Based on the May 14th Globe, the rates are as follows: US Fed:4.5%, US Prime:8.0%, Bank of Canada: 5%, Canadian Prime: 6.5%. Forecasters expect a 3.75% US Fed rate by the Fall. These rates are very important instruments used to control our economic system (like a control mechanism). Lower rates will encourage spending and investment leading to economic growth. But, too fast an economic growth (2-4% is good) may lead to inflation (i.e. escalating prices), which is bad. Hence interest rates are tweaked from time to time to maintain a healthy balance. The relative interest rates, i.e. USA vs CAN, also affect currency exchange rates (by influencing relative demand for each currency). Some other useful tidbits from the economic section: US GDP: $9.4 Trillion, Cdn GDP: $798 Billion. CPI (Cdn) +2.5%, US +3%. (CPI=Consumer Price Index)
Class#1 9May01: GDP & Interest Rates, Market Cap, BC Economy and High Tech in B.C.
What is GDP (esp in practical terms)? What's GNP? What is the "Prime rate" and why is it so important? How strong is B.C.'s economy and what are the leading industries in the Province? How does High Tech rank? How many people are employed in the various industry sectors in B.C.? How is the value of a company determined? btw - economic statistics can be found in each Monday's edition of the Globe and Mail - check it out!
Class#12 24Jul02: D&O Insurance, Hedge Funds, Double Dipping, Splits, Auditor, Governance, Stretching and Cheating (how to), Stock Swap, Splits and Rollbacks
Class#11 17Jul02: Futures Contracts
Today I presented an overview of futures markets and how futures contracts work. Be familiar with the terminology - e.g. definition of a future, spot price, leverage, margin deposit, trade fees, etc. Note that you don't actually have to "sign" a "contract" - you are obligated by virtue of executing a buy or sell trade. Check my article on futures for more info.
Class#10 10Jul02: Burn Rate and Flameout, Bubble Junkie, Due Diligence,
Bootstrap vs Kickstart, QQQs (Barry mentioned), Series A, Liquidity, Exit Strategy,
Termsheet, OEMs, Expensing Options, Angel vs VC Returns
These are all terms that came up in today's class. Surprisingly, and without prior discussion, our guest speaker, Barry Jinks from Colligo used much of the same terminology that was used earlier in the class discussion. Make sure you understand these terms. Check glossary. Do you understand how companies would expense options on their financial statements? Where and how would they record this. Try it with an example. When considering Angel investors or VC (Venture Capital) investors, bear in mind that these investors are looking for a multiple return - i.e. Angels like to get 10 to 100 times their money back. After all, they are taking HUGE risks. Venture Capitalists, who come in a little later when the risk is a little lower, like to get 2 to 10 times their money back.
Class#9 3Jul02: Bonds and Interest Rates, Creative Accounting, Stock Index (e.g. Dow, TSX, Nasdaq), EBITDA, Auditors, Burn Rate
Check the glossary for some of these definitions. Creative Accounting is what a lot of people are calling the aggressive accounting practiced by firms trying to look better than they really are - e.g. not writing off goodwill, etc. Contrary to popular belief, accounting is not black and white. There's a great deal of discretion involved. Sometimes, not always, that discretion borders on dishonesty. Remember the 20/60/20 rule! Auditors are supposed to help companies in presenting accurate financial information. But, they too, have some discretion and as we've seen, they have misused that discretion. It killed Arthur Andersen.
Class#8 26Jun02: Guest Speakers
Guest speakers today.
Class#7 19Jun02: EPS and PE, Short Positions, Covered Calls, Stock Splits
Note that EPS (earnings per share) and PE (Price/Earnings multiple) are commonly used performance measures. Why is EPS more meaningful to shareholders than simply Earnings? How do earnings tie in to the Balance Sheet? How can you short a stock? Why would you short a stock? What are the risks of shorting? You can even short an option. But, if you own the underlying stock, then you are not shorting an option when you sell it - this is called a covered call. Shares in companies are often split. Why is this done? Shares can also be reverse-split? What's another name for this? Why would this be done?
Class#6 12Jun02: Stock Options, Insider Trading, D&O Insurance, Price to Sales Ratio
Check the BCSC's Glossary for definitions. Is "Insider Trading" illegal? To at least partially protect officers and directors of a company against liability, it may be possible to get Directors and Officers liability insurance - but it will be very expensive. How much would guess? As a quick and dirty way of coming up with a value for a company, a multiple of sales could be used - especially handy when comparing with other companies. For example, if certain types of software companies have a market cap equal to annual sales, the Price to Sales ratio is 1 and this rule of thumb could be used in assessing comparable companies. In the spring of 2000, the ratio was very high - over 10 for tech companies.
Class#5 5Jun02: Money Laundering, Honesty, Tax evasion, Income Charges, Gold, Fiscal Policy, Interest Rates
Money laundering - converting dirty money into "clean" money. What's dirty money? What are some ways that laundering is accomplished? This, plus what's been in the news lately, makes you wonder about honesty and integrity. Fact is, according to a top accounting firm, that 20% of the population is inherently dishonest, 20% is inherently honest, and the remaining 60% will swing either way depending on circumstances! Makes you think, eh? As we've seen in the news, any kind of tax evasion is very serious - criminals are dealt with more harshly than the most perverted of perverts! Sad! Don't evade - avoid - that's what I say, and that's OK. Note that some companies take extraordinary income charges - i.e. special hits against their income due to irregular, non-recurring events such as inventory write-offs, investment losses, layoff costs, etc. These are shown as separate line items because they are "unusual". Note the recent interest in gold. Gold used to be the standard benchmark before the US dollar took over. Some predict that, in view of world uncertainties, gold might pass the $1k/oz price. Finally, we talked about fiscal policy and Paul Martin's legacy - being able to reduce the debt by running a surplus, rather than a deficit, and in the process even reducing taxes for more economic stimulation. Perhaps the single most important economic variable is interest rates. This is the main instrument used by the Central Bank for stimulating (or damping) the economy. Yesterday, the bank rate was increased which in turn raised the prime rate to 4.25% - the rate available to the "best" bank customers.
Class#4 29May02: Self Employment, Hedge Fund, Investment Returns, Capital Gains
Further to our discussion on self-employment and taxation, here's a recent article by Tim Cestnick on this subject. A Hedge fund is a riskier pooled fund (usually for wealthy investors) which, along with traditional stocks, also invests in highly leveraged hedging instruments such as Futures contracts and Options on Futures. Investment returns generally range from a few percent to several thousand percent - it all comes down to a risk-reward relationship. The higher the risk, the higher the potential reward. How do bonds, stocks, real estate and other investments compare? Capital Gains are profits made on investments (not interest types, though) such as buying and selling company shares. These are taxed (to encourage investment) at lower rates - presently at 50% of the normal income tax rates.
Class#3 22May02: ESA, Receivership, Stock "cross", Market Cap, Lifetime Cap Gains exemption, etc
ESA - that's the BC Employment Standards Act - a piece of legislation that'll have major ramifications for tech companies in B.C. When a company gets into trouble, a receiver may be appointed to liquidate assets and settle debts. Which creditors get paid first? Do all creditors get something? Sometimes you will see a large number of shares trade as a block, e.g. in a thinly traded stock. This may be a "Cross" - i.e. a brokered deal between a buyer(s) and seller(s) - of a large block of shares. Market Capitalization refers to the market value of a company - simply its share price multiplied by the number of shares outstanding. Canadian entrepreneurs are rewarded for their efforts when they sell the shares in a company they have created. The Lifetime Capital gains exemption allows each person to enjoy a tax-free capital gain (by selling company shares) up to a lifetime maximum of $500K!! After that, shares are taxed at half the normal rate of employment income. Obviously, this is a huge incentive to encourage entrepreneurship.
Class#2 15May02: Writedowns, Market Value, Stock Info - ticker, volume, etc
We talked about JDS' writedown of its Nortel stock holdings. This is like depreciation (e.g. of a car) - the difference between book (or paid) value vs the market value (that value that someone is willing to pay). We also took a look at Yahoo finance - see quote.yahoo.com - as a tool to learn about public companies. We briefly discussed some of the terminology - volume, ticker, price, etc.
Class#1 13May02: BC Economy and High Tech in B.C., SEDAR, Prospectus, "Red Herring", IPO
These are some of the topics we briefly touched on. You can find info on these in the glossary or elsewhere. SEDAR (www.sedar.com) is the central depository for all corporate (public company) data. Slides from my class presentation will be accessible from the syllabus.
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