Proactive Structural Dynamic Global Portfolio Valuation and Financial Statement Analysis
---Global Equities Valuation Operations Simulation Analysis (OSA)’Forecasts

Dr. Warren Huang pioneer top down proactive global structural financial equities valuation modeling Operations Simulation Analysis:
Proactive Structural Dynamic Country Analysis: Quantify the unknown, uncertain future, forecast years, month ahead of last 30 years causes, onset, spread, recovery , early warning global boom and bust, currency, financial crisis, energy ,IT asset prices bubble bursts, the risks and

Opportunities of emerging bull/bear market trend
Through simulation of Monetary economic, fiscal, WTO policy impact on the country sustainable GDP growth, price stability inflation, interest rate, currency, financial systemic stability, business cycle, cleunemployment, credit, political risks ,
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lequFinancial ratios play a key role in tracking,/forecasts and fighting firllem’s unknown, uncertain futures performance and risks and corporate scandals early warning,ter

OSA pioneer Dr. Warren Huang has implemented Proactive Structural top down equities valuation for Financial ratios global equities valuation, investments . (1) proactive structural equities valuation (2) Tracking, simulate macro, financial, economic impact on global industrial analysis, stock’s systematic risk (beta ) (3)tracking, forecast credit quality ranking bonds (4) predicting the systematic risks shock impact on insolvency (bankrupts) of the film .The we will discuss how the ratios have been used in each of the four areas ,and the specific ratios found to be most useful .

Most valuation models attempt to derive a value based upon one of several present value of cash flow models or an appropriate relative ratio for a stock . All the valuation models are influenced by the expected growth rate of earning , cash flows or dividends ,and the required rate of return on a the stock , Clearly ,financial ratio can help in making these estimations. The estimation of growth rate for earnings ,cash flows or dividends employs the growth ratios –the rentation rate of return and the return on investments (equity or total assets ) .

When estimating the required rate of return on the security ( the cost of equity ,k, the weighted average cost of capital ,WACC ),you will find it depends on the risk premium ,which is the function of business risk ,financial risk and liquidity risk .Business risk is measured by the volatility of the earnings .Financial risk is determined by the debt proportion ratios ( the interest coverage , or cash flows ratios ) or the flow ratios .with insights regarding the liquidity risk ,which can be derived from the external liquidity measured .

The typical empirical valuation model has examined a cross section companies and used a multiple regression model that relates the price –earnings ratios for the sample firms to some of the following corporate variables.( the averages generally consider the past 5 or 10 years .)

The relevant ratios are average interest coverage ,average dividend payout ,average return on equity ,average retention rate ,average market price to book value ,average market price to cash flow ,average market price to sales.

A three-step investment process

1. analysis of alternative economies and security markets .the objective is to decide how to allocate investment funds among countries and within countries to bonds ,stocks ,and cash .

2. analysis of alternative industrials .based upon the economic and security market analysis ,determine which industrials will prosper and which industrials will suffer on a global basis and within countries ,

3. analysis of individual companies and stocks .based upon the analysis of economy and industrials ,determine which companies will prosper and which stocks are undervalued .

Approaches to equity valuation :

1.discounted cash flow techniques .

present value of dividends

prevent value of operating cash flow

prevent value of free cash flow

2 .relative valuation techniques .

price/earnings ratio (P/E)

Price /cash flow ratio (P/CF)

Price /book value ratio (P/BV)

Price /sales ratios (P/S)
These static ratio use 3 month old financial data, fail to track , forecast the future macro, financial, industrial economic impact on future price trend, Take recent US subprime crisis for example, CFC (country wide financial CFC stock price plunge from 45 to 13 as its PE ratio

plunged from 13 to 3.5, and earning per share stay as high as 3.75, as its earning swing from billions to 1.2 billion loss in the third quarter , 2007, low PE and high earning per share does not provide good value investment.

Derivatives

The fundamentals of option valuation

The primary difference between put-call parity and what follows are twofold. First ,the portfolio implied by the put-call parity transaction did not require special calibration .it simply consisted of one stock long ,one put long ,and one call short – a mixture that required no adjustment prior to the expiration date .However, hedging an underlying asset position’s risk with a single option position ---whether it is a put or a call ---often involves using multiple contracts and frequent changes in the requisite number to maintain the riskless portfolio .second, the put –call parity paradigm did not demand a forecast of the underlying asset’s future price level whereas the following analysis will.

C0=SN(d1)-X(e-(RFR)t)N(d2)

The black-scholes valuation model has several attractive features .A joint examination of the expressions for c,d1,d2,reveals that the option’s value is a function of five variables :

1. current security price

2. exercise price

3. time to expiration

4. risk-free rate

5. security price volatility ----the forecast of future stock price

Management Accounting :

Cost-volume-profit (CVP)analysis expresses the relationships among costs ,volume ,and profit or loss .That is ,you use CVP analysis to estimate how changes in volume affect costs and profits , to do this ,you first need to understand cost behavior: how costs change –if they change at all –as volume changes .

,breakeven points.

Managers use Contribution margin and CVP analysis to make decisions. Managers often extend this approach by using variable costing—which assigns only variable manufacturing costs to products .Then they use variable costing to prepare special income statements for internal management decision for internal management decisions .These variable costing income statements group costs by behavior—variable cost or fixed cost –and highlight the contribution margin .

External reporting

Up to this point, you have focused on the income statements that companies prepare for external reporting under GAAP.GAAP requires that we assign both variable and fixed manufacturing costs to products . Consequently ,published financial statements are based on absorption costing ,this approach is called absorption costing because products absorb fixed manufacturing cost as well as variable manufacturing costs .

Supporters of absorption costing argue that products can not be produced without fixed manufacturing costs ,so these costs are important part of products cost .

The only difference between absorption accounting and variable costing is that absorption costing considers fixed manufacturing costs as inventoriable products costs, while variable costing considers fixed manufacturing costs as period costs (expenses ).

The master budget and responsibility accounting .

A budget is a written plan that communicates management’s goals to employees .it is far more effective to have a formal ,written plan than simply to communicate verbally with employees ,as there is less chance of misunderstanding management’s goals .

The master budget includes three types of budgets :the operating budget ,the capital expenditures budget and the financial budgets .

A responsibility accounting system divides a business into subunits called responsibility centers .A manager is assigned to each responsibility center and is evaluated on how well the responsibility center performs.

A resposibilty, center is a part or subunit of the organization whose manager is accountable for specific activities .

In a cost center managers are accountable for cost only .in a revenue center ,managers are primarily accountable for revenues .

In a profit center , managers are accountable for revenues and costs ,and therefore profits.

In an investment center ,managers are accountable for investments ,revenues ,and costs .

Activity-based costing focuses on activities as the fundamental cost objects.