Post on 07-Jul-2018
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Taxation
• Pre-dividend imputation (prior to 1987)
–
Dividends were taxed twice—first at company level (as profits) and thenat the investors mar!inal rate
• Dividend imputation (since 1987)
– "emoved the dou#le taxation of dividends
–
$nvestors receive fran%in! credit for the tax a company pays on afran%ed dividend
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• &apital !ains tax on shares purchased
– Prior to 19'9'198 tax free
– 19'9'198*1'9'1999• +axpayers mar!inal tax rate applied if held less than 1* months
• +axpayers mar!inal tax rate applied to indexed capital !ain if held
over 1* months
– ,ince *1'9'1999
• . discounted !ain if held at least 1* months/ or
• indexed capital !ain or . discounted !ain if purchased
19'9'198*1'9'1999
Taxation
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Financial performance indicators
• Potential investors are concerned with the future level of a companys
performance
• &ompanys performance affects #oth the profita#ility of the company and the
varia#ility of the cash flows
• $ndicators of company performance
– &apital structure
– 0iuidity
– De#t servicin!
– Profita#ility
– ,hare price
– "is%
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Capital structure
• Proportion of company assets (fundin!) o#tained throu!h de#t and euity
– 2sually measured #y de#t to euity ratio (D'3)
• 4i!her de#t levels increase financial ris%/ i5e5 firm may not #e a#le to
meet interest payments
– 6lso measured #y proprietorship ratio which is the ratio of shareholders
funds to total assets
•
$ndicates firms lon!er term financial via#ility'sta#ility/ a hi!her ratioindicates less reliance on external fundin!
Financial performance indicators
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Liquidity
• +he a#ility of a company to meet its short-term financial o#li!ations
• easured #y current ratio
– ails to consider the not very liuid nature of certain current assets
such as inventory
Financial performance indicators
year)onewithin(due slia#ilitiecurrent year)onewithin(maturin! assetscurrent
ratio&urrent
=
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Liquidity (cont.)• easured #y liuid ratio
• +he hi!her the current and liuid ratios the #etter the liuidity position of a
firm
Financial performance indicators
overdraft#an%-slia#ilitiecurrenthand)on(stoc%inventory-assetscurrent ratio0i1uid =
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Debt servicing
• 6#ility to meet de#t-related o#li!ations i5e5 interest and repayment of de#t
• easured #y de#t to !ross cash flow ratio
–$ndicates num#er of years of cash flow reuired to repay total firm de#t
• easured #y interest covera!e ratio
Financial performance indicators
interestandchar!esleasefinance
taxandinterestchar!es7leasefinance#eforeearnin!s cover $nterest =
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Profitability
• :ide variation in the measurement of profita#ility
– 3arnin!s #efore interest and tax (3;$+) to total funds ratio
– 3arnin!s per share (3P,)
Financial performance indicators
)#orrowin!sandfundsers
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Profitability (cont.)
• :ide variation in the measurement of profita#ility (cont5)
– 3;$+ to lon!-term funds ratio
Financial performance indicators
de#t)term-shortlessfundstotal(i5e5fundsterm-lon!
3;$+
ratiofundsterm-lon!to3;$+ =
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Profitability (cont.)
• :ide variation in the measurement of profita#ility (cont5)
– "eturn on euity (net income'euity)
– 4i!her ratios indicate !reater profita#ility
Financial performance indicators
funds)ers
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!are price• "epresents investors view of the present value of future net cash flows of a
firm
• ,hare price performance indicators
– Price to earnin!s ratio (P'3)
• ,hare price divided #y earnin!s per share
• 6 hi!her P'3 indicates more !rowth in future net cash flows
– ,hare price to net tan!i#le assets ratio (P'=+6)• easures the theoretical premium or discount at which a firms
share price is tradin! relative to its =+6
Financial performance indicators
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• 3valuate and apply #ottom-up and top-down approaches to fundamental
analysis
• Descri#e and apply technical analysis techniues
• 3xamine the role of pro!ram tradin!
• 3xplain the theoretical concepts and implications of the random wal% and
efficient mar%et hypotheses when forecastin! share price movements
Learning ob"ectives
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!are price
1>
? ,hare price is determined #y supply and demand of a companys
shares
? 3xpectation of #ad company performance causes investors to sell
their shares increasin! supply and reducin! the price
? 3xpectation of !ood company performance increases demand and
leads to an increase in share price
:hat causes the shifts in demand and
supply of a companys securities on thesecondary mar%et@
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• +hree approaches to answerin! this uestion
–
15 undamental analysisA top-down
– *5 undamental analysisA #ottom-up
– >5 +echnical analysis
!are price
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Fundamental analysis
1
? &onsiders macro and micro factors that impact upon cash flows andfuture share prices of various industry sectors and firms
? acro factors include interest rates economic !rowth #usiness
investment
? icro factors are firm-specific and relate to mana!ementsimpact on company performance
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Top#do$n approac!
1B
? &onsiders macro factors
? 3conomic !rowth of international economies
? 3xchan!e rates
? $nterest rates
? Domestic economy
? Crowth rate
? ;alance of payments
? $nflation
? :a!e and productivity !rowth
? Covernment responses to chan!es in the a#ove factors
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%conomic gro$t!
17
?+he hi!her the !rowth rate in the rest of the world the !reater thedemand for 6ustralian exports
? ,ectors #enefittin! from international !rowth determined #y source of
the !rowth
? Crowth can #e driven #yA
? increased consumer demand
? increased #usiness investment in euipment
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Flip side of gro$t!
18
? Cenerally !reater domestic !rowth leads to increased profita#ility of
firms
? ;ut hi!h !rowth can lead to any of the followin! factors that can
reduce firm profita#ilityA
? Deterioration in #alance of payments
? $ncrease in inflationary pressures
? Pressure on wa!es
? Depreciation of the exchan!e rate
? "ise in interest rates
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Currency
19
? 6ffect the domestic currency profit of exporters that uote their
products in forei!n currency prices? 6 stren!thenin! 6ustralian dollar (62D) ma%es these firms worse
off #ecause the 62D value of their exports is lower
? +he stren!th of the 62D over the past few years has led to calls
for assistance from the manufacturin! industry for example
? 3xchan!e rates also affect firms indirectly
? 35!5 devaluation of currency increases cost of imports there#y
increasin! inflation
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&nterest rates
*
? 4ave #oth a direct and indirect impact on a firms value
? Direct effect on profita#ility
? "epresents the cost of de#t finance for #orrowers and the
return for finance providers
? $ndirect effect on profita#ility
? "ise in interest rates may indicate a slowin! of economicactivity
? uture reduction in profita#ility
? 6 stron! relationship exists #etween interest rates and exchan!e
rates
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&nflation
**
? 3ffect of inflation on firms real profit
? +ax treatment of inflation
? a%es historical-#ased depreciation allowances inappropriate
? &om#ined with hi!her replacement costs leads to an
overstatement of after-tax profit
? $nventory
? $nflated sellin! price of inventory creates an illusion of inventory
profits
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'ottom#up approac!
*>
? ollowin! identification of the #est economies and industry sectors for
investment usin! the top-down approach the #ottom-up approach
can #e used to identify the #est companies within these
? ;ottom-up approach considers micro factors usin! ratios and other
measures of a firms financial characteristics and performance
? &onsiders factors such asA
? 6ccountin! ratios that assess a companys capital structure
liuidity de#t servicin! profita#ility share price and ris% (see
&hapter B) o#servin! the trend and ma%in! comparisons with
firms in the same industry
? 6dditional information on %ey mana!ement chan!es corporate
!overnance and strate!ic direction
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Comparing companies
*E
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Tec!nical analysis
*
? 3xplains and forecasts share price movements #ased on past price
#ehaviour
? 6ssumes mar%ets are dominated at certain times #y mass
psycholo!y from which re!ular patterns emer!e
? +wo main forecastin! models
? ovin! avera!es (6)
? &hartin!
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oving averages
*B
? ,mooth out a series facilitatin! the identification of trends in the series
? &alculation of 6? 6ssumin! a five-day movin! avera!e the 6 is calculated #y
ta%in! the avera!e of the price series for the precedin! five days
? +radin! rules
? ;uy when the price series cuts the 6 from #elow
? ;uy when the 6 series is risin! stron!ly and the price series cuts
or touches the 6 from a#ove for only a few o#servations
? ,ell when the 6 flattens or declines and the price series cuts the6 from a#ove
? ,ell when the 6 is in decline and the price series cuts or touches
the 6 from #elow for only a few o#servations
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C!arting
*7
? $nvesti!atin! patterns in price charts
? ,everal techniues
? +rend lines
? ,upport and resistance lines
? &ontinuation patterns
? "eversal patterns
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Trend lines
*8
+rends are re!ular movements in share prices
+wo types of trends
15 2ptrend line—connectin! the lower points of risin! price series
*5 Downtrend line—connectin! the hi!her points of fallin! price
series
"eturn line—line drawn parallel to a trend line to create a trend
channel
&ritical issue is to determine when the trend line is !oin!
to chan!e
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upport and resistance lines
*9
? ,upport levels—where there is sufficient demand to halt further pricefalls
? "esistance levels—where there is sufficient supply to halt further
price increases
? ,tron! levels—historical support and resistance
? :ea% levels—support and resistance #ased on more recent activity
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Continuation patterns
>
,ideways share tradin! that does not normally si!nal a chan!e in trend
+wo types
15 +rian!les—composed of a series of price fluctuations each
smaller than its predecessor
,ymmetrical trian!le (no chan!e in trend)/ ascendin! trian!le(uptrend)/ descendin! trian!le (downtrend)
*5 Pennants and fla!s—formed durin! a sharp rise in prices (the
pole)/ then tradin! volume reduces and increases suddenly to
ta%e prices sharply hi!her
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eversal patterns
>1
Fccur after a maGor mar%et move
"esult in a head and shoulders pattern
+hree successive rallies and reactions the second rally #ein!
stron!er than the first and third rallies
i5 0eft shoulder—formed #y volume-stron! rally on uptrend
followed #y reduced-volume reaction
ii5 4ead—second rally increases price #efore reaction moves
price #ac% to previous low
iii5 "i!ht shoulder—final rally mar%ed #y reduced volume
indicatin! price wea%ness
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*alidity of tec!nical analysis
>*
? 3ven where techniues have no apparent underlyin! validity if theyare followed #y enou!h participants they may impact on share price
#ehaviour at times
? ore li%ely to forecast successfully when share prices move out of a
ran!e explained #y economic and financial fundamentals