Documente Academic
Documente Profesional
Documente Cultură
NOVEMBER EDITION
The Society
Our Team
4-5
What is ICIS
Key Terms
Analysis in Depth
Discounted Cash Flow
7-9
Rights Issues
10
Options
11
12
Member Articles
12-13
14
Sharing Economy
15
16
17-22
The Industry
Types of Internships
A Previous Interns Advice
23
24-25
Useful Websites
26
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2
OUR SPONSORS
GOLD
Bronze
Disclaimer
Contributors:
Colton Morris, Olivier Khatib, Lawrence Law, Shashi Hazra
David Hill, Kenneth Kan, Taran Patel, Xiaohan Zhang, Maximilian Niroomand
Kenrick Kan, Matthew Gela, Martin Chak, Ellis Skinner
3
THE SOCIETY
Management Team
Vibhav Sajjan
Ellis Skinner
Taran Patel
President
Vice-President
Events Team
Adi Krpo
Events Director
Marketing Director
3rd MechEng
THE SOCIETY
ICIS Magazine Team
Ahmed Raja
Olivier Khatib
Editor-In-Chief
Production Editor
Postgrad CompSci
Lawrence Law
Shashi Hazra
Design Editor
Publicity Director
Administrative Team
Siddharth Garg
Webmaster
3rd Year EEE
Benjamin Skirrow
Treasurer
3rd Year Mathematics
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Matthew Gela
Secretary
3rd Year Biochemistry
What is ICIS?
ICIS is the fastest growing student-run society at Imperial. We hold weekly stock pitches every Tuesday on campus using a virtual trading portfolio, with the capability for investments into most major global markets (LSE; NYSE; NASDAQ etc.). Our Tuesday meetings aim to
be interactive and informative, where all members present have the chance to present, ask
questions and vote on proposed investments. As a member, you are welcome to attend all
our events for free, and we wont spam you with emails, typically just a weekly update informing you of all our great opportunities we have to offer that week, as well as other key dates to
watch out for.
Key Terms:
In order to get the most out of our events and improve your understanding of financial news
articles and our sponsors websites, we have compiled a list of essential common phrases and
acronyms to help you out:
Asset:
Bond:
A Security based on debt obligation. Ownership of a bond means that you have lent money to somebody and in return you shall receive your money back at a future date plus additional annual repayments as a reward for lending.
Equity:
FX/FOREX:
Hedging:
Hedging is an investment strategy which reduces how much risk you are exposed to. This
is typically done using derivatives. A more in depth example is presented later on.
Interest Rate:
IPO:
Initial Public OfferingA privately owned company offers the general public the opportunity to buy shares of the company. This means for the company to raise capital by selling off partial ownership of it.
LBO:
Leveraged Buy OutWhen one company buys another firm, using borrowed money to
pay for the acquisition.
Liquidity:
M&A:
Mergers and Acquisitionsa subdivision within the investment banking department (IBD)
which deals with advertising client companies on takeovers and mergers.
Option :
A security that when purchased gives you the ability to execute a future transaction at a
price agreed upon todays market.
Proprietary
Trading:
Buying or selling securities in order to make a direct profit. This is in contrast to how
most investment banks trade on behalf of their clients.
Security:
Stock/Share:
DCF
Fundamental Valuation Method of a Company:
Discounted Cash Flow (DCF)
DCF analysis says that a company is worth all of the cash that it could make available to investors in the future. It is described as "discounted" cash flow because cash in the future is worth less than cash today.
1) FORECASTING FREE CASH FLOWS
Free cash flow is the cash that flows through a company in the course of a quarter or a year, once all cash
expenses have been taken out. This is calculated as, (see figure):
Future Operating Costs: i.e. salaries, cost of goods sold (CoGS), selling and
general administrative expenses (SGA), and research and development
(R&D). A good place to start when forecasting operating costs is to look at
the company's historic operating cost margins. The operating margin is operating costs expressed as a proportion of revenues.
Taxes: Many companies do not actually pay the official corporate tax rate on their operating profits. For instance, companies with high capital expenditures receive tax breaks. Thus, it makes sense to calculate the tax
rate by taking the average annual income tax paid over the past few years divided by profits before income
tax.
Net Investment: You can calculate net investment by taking capital expenditure, disclosed in a company's
statement of cash flows, and subtracting non-cash depreciation charges, found on the income statement.
Change in Working Capital: Working capital refers to the cash a business requires for day-to-day operations,
or, more specifically, short-term financing to maintain current assets such as inventory. Working capital is
calculated as current assets (i.e. account that represents the value of all assets that can reasonably expected to
be converted into cash within one year) minus current liabilities (i.e. company's debts or obligations that are
due within one year).
Net change in working capital is the difference in working capital levels from one year to the next. When
more cash is tied up in working capital than the previous year, the increase in working capital is treated as a
cost against free cash flow.
2) CALCULATING THE DISCOUNT RATE
Having projected the company's free cash flow for the next five years, we want to figure out what these cash flows are
worth today. That means coming up with an appropriate discount rate which we can use to calculate the net
DCF
1)
Cost of Equity:
Where:
rf is the risk-free rate (ie. amount obtained from investing in securities considered free from credit risk,
such as government bonds from developed countries)
is Beta (ie. it measures how much a company's share price moves against the market as a whole. A
beta of 1 indicates that the company moves in line with the market. If beta is more than 1, the share is exaggerating the market's movements. If less than 1, it is more stable).
(rm - rf) is the Equity Market Risk Premium (ie. it represents the returns investors expect, over and
above the risk-free rate, to compensate them for taking extra risk by investing in the stock market).
2) Cost of Debt:
Where:
-
Finally, the WACC is the weighted average of the cost of equity and the cost of debt based on the proportion
of debt and equity in the company's capital structure:
Where:
g = growth rate
n = the number of years
FCFF = free cash flows forecasts
DCF
The formula rests on the big assumption that the cash flow of the last projected year will stabilise and continue at the same rate forever.
To arrive at a total company value, or enterprise value (EV), we simply have to take the present value of the
cash flows, divide them by the company's 11% discount rate and, finally, add up the results.
Where:
CONS
stock value
SOURCE:Investopedia.com
Rights Issue
Rights Issues Explained
Cash-strapped companies can turn to rights issues to raise money when they really need it. In these rights
offerings, companies grant shareholders a chance to buy new shares at a discount to the current trading
price.
A rights issue is an invitation to existing shareholders to purchase additional new shares in the company.
More specifically, this type of issue gives existing shareholders securities called "rights", which, well, give the
shareholders the right to purchase new shares at a discount to the market price on a stated future date. The
company is giving shareholders a chance to increase their exposure to the stock at a discount price. But until
the date at which the new shares can be purchased, shareholders may trade the rights on the market the
same way they would trade ordinary shares. The rights issued to a shareholder have a value, thus compensating current shareholders for the future dilution of their existing shares' value.
Troubled companies typically use rights issues to pay down debt, especially when they are unable to borrow
more money. But not all companies that pursue rights offerings are shaky. Some with clean balance sheets
use them to fund acquisitions and growth strategies. For reassurance that it will raise the finances, a company
will usually, but not always, have its rights issue underwritten by an investment bank (This means that the
bank will provide the remaining amount if the issue fails).
In estimating the dilution, remember that you can never know for certain the future value of your expanded
holding of the shares, since it can be affected by any number of business and market factors. But the theoretical share price that will result after the rights issue is complete - which is the ex-rights share price - is possible
to calculate. This price is found by dividing the total price you will have paid for all your shares by the total
number of shares you will own. For the Lonmin example later on, this is calculated as follows:
-
16.50
46
62.50
1.33
GBX
GBX
GBX
GBX
So, in theory, as a result of the introduction of new shares at the deeply discounted price, the value of each
of your existing shares will decline from 16.50 GBX to 1.33 GBX. But remember, the loss on existing shareholding is offset exactly by the gain in share value on the new rights: the new shares cost you 1 GBX, but
they have a market value of 1.33 GBX. These new shares are taxed in the same year as you purchased the
original shares, and carried forward to count as investment income, but there is no interest or other tax penalties charged on this carried-forward, taxable investment income.
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Options
Pricing Options
Options are contracts that, when sold, gives the purchaser the right, but not the obligation to sell or buy an
underlying asset within an agreed upon period of time at an agreed upon price. A call option is a one where
the investor is given the chance to buy in the future, and a put option is one where he/she can sell if it is so
wished.
Its a financial instrument designed to hedge the risks taken on by the investor. If the investor is uncertain
about the future of an asset and how it will be priced, the option of selling or buying it in the future at a price
ascertained today can help ease the exposure to risk and allow the investor to cap their losses, at the price of
reduced potential profit.
On the opposite side of the deal, it forces the seller to take on risk. If for example a put option was sold, the
seller has the obligation to buy an asset from the buyer of the option if the buyer so wishes. If the asset becomes worthless in the future, the seller will effectively have to spend money on worthless assets.
Which leads us to think about how one should price options? In 1973, Fischer Black and Myron Scholes
wrote a paper on the estimation on the pricing of European derivatives, arriving at a partial differential equation that has been shown to give reasonable accurate predictions. Its called the Black Scholes equation and
is widely used by investment banks. The derivation is one that is a bit much to be stated here, but it demonstrates one of the many ways in which Mathematics has a part to play in the world of investment.
Its worth highlighting the fact that Scholes then went on to become a partner of a hedge fund called LongTerm Capital Management, and a year after winning a Nobel prize for Economics, the firm suffered tremendous losses and crashed.
Also worthy of note is how the equation changed the derivatives market, leading to more and more quantitative and mathematical models along with an expansion in the trading market. Some say its dangerous to rely
on these models since assumptions are not always correct, and that its not only the bankers who suffer the
losses. Regardless, these models continue to be widely developed.
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Ferrari IPO
Ferrari is the brand in the luxury automotive industry. Everyone can identify its prancing horse. This naturally creates increased hype and excitement. There will be people buying shares of the company simply because
of brand loyalty and to be part of the Ferrari movement. With only 10% of Ferrari shares being available on
the market, this creates a high demand. But will this scarcity possibly turn out to be a poor move on Fiats
end? As it is, the hype of the Ferrari IPO has settled down and its share price has already slid below its IPO
price.
Ferrari needs to keep growing. Last year, it had only about 7000 shipments which might seem like there is a
lot of room for growth. However, the limited number of cars available provides a form of exclusivity. It is this
that attracts the wealthiest people into buying a Ferrari. This year, Ferrari plans to increase its shipments to
about 9000. CEO of Fiat Sergio Marchionne said that this would be "to determine the natural limits of the
brand." Thus Ferrari needs to find a balance between expansion and maintaining its luxury image.
But Ferrari doesnt just sell cars. Another big source of its revenue is from engine sales to other automakers,
especially Maserati. It is worth noting that engine sales to Maserati in early 2015 declined compared to the
same period in 2014. This is because Maserati had reduced its vehicle shipments by 15%. This negative
trend is something that investors should be wary of. After all, as a luxury automaker
Maserati does need to keep its cars limited
to maintain its exclusive image as well.
Another form of Ferraris revenue comes
from merchandising and licensing. Ferrari
currently has two theme parks, and licensing partnerships with companies such as
Oakley and Microsoft. It should be noted
that having a large source of revenue from
merchandising and licensing could expose
Ferrari to greater risks. This is because Ferrari can be negatively affected if its partner
companies perform poorly.
SOURCES:RoadandTrack.com,TheFinancialTimes
However, we do have to take into account that Ferrari has indeed made merchandising a key area it would
like to expand into. Merchandise has still continued to contribute a decent fraction of Ferraris revenue. In
2014, it had made about 15% of its revenue from merchandising. Marchionne has also announced that Ferrari will look into extending its branding to not only luxury cars but luxury goods.
We also do need to take into account that ultimately Ferrari is a luxury automaker and it does provide cyclical protection. During its IPO, the company pushed for a luxury good valuation instead of an automaker valuation. Clientele of Ferrari are the wealthiest of people and despite economic downturns, we can expect
these wealthy people to still purchase the cars.
Overall, Ferrari seems to be lacking in terms of its growth plans. It will be difficult for the company to find
the right balance between expansion and maintaining the exclusivity of the brand. Investors should probably
wait before plunging into the Ferrari hype that has caused its overvaluation.
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14
Sharing Economy
Sharing Economy Friends or Foes?
Sharing economy has been gaining a lot of attention recently, thanks to the huge growth of companies and
start-ups such as Airbnb and Uber. Airbnb is a website for people to rent their spare rooms to strangers for
short stays, which has amassed over 1,500,000 listings in 34,000 cities and 190 countries. Uber is an app
which allows people to submit a trip request to Uber drives with their own cars. By May 28, 2015, the service
was available in 58 countries and 300 cities worldwide. The huge growth of these two companies could be
attributed to its underlying business model of sharing economy.
What is Sharing Economy?
In short, sharing economy is a peer-to-peer borrowing and renting of goods and services. In fact, people have
shared the use of assets for many years. However, the advent of Internet has facilitated the sharing process by
making the process much easier than ever before. Since then, many start-ups have turned sharing into a profitable business model.
The Good
Optimization of Resources
Sharing economy enables the optimization of resources by utilizing unused resources. Take Airbnb as an
example, it allows user to rent out empty room but at the same time charge the guests at a lower price than a
normal hotel. It adds economic value to items that would otherwise be unutilized.
New Jobs
Many job opportunities could be created by sharing economy companies. These jobs are in many ways more
flexible than traditional employer-employee relationships. You can work whenever and wherever you want
by being a Uber driver. Moreover, you will have more autonomy on the service you provided.
The Bad
Safety and Liability
Sharing economy can raise safety concern of the customers. Recently, journalist Zak Stone has wrote a tragic
account on how his dad died during a family Airbnb rental. In fact, it is hard for the company to ensure customer safety, since it only provides a platform but not the service itself. And perhaps a more important question is who is responsible for the safety of the customer.
Tax and Regulation
Sharing economy can create loophole in the taxation system. Guests living in hotel are required to pay tax
but guests living in Airbnb do not need to pay any tax. It can dramatically reduce the taxation income of the
government. To counter this, UK Revenue & Customs plans to roll out new measure to target these companies to raise 1bn of extra tax by 2021.
Conclusion
Sharing economy has been seen transforming many industries such as transportation, accommodation and
skills. It disrupt the traditional industries by offering a cheaper alternative and creating new freelance jobs. At
the same time, there are safety, liability, taxation and regulatory concerns over sharing economy companies.
Although we could not rule out its downsides, sharing economy does promote efficient use of resources
which is good for our economy. Perhaps, we should not ask whether it is a friend or foe for us, but more importantly how we could mitigate its risks.
SOURCES:Uber.com,Airbnb.com,Investopedia,TheGuardianandMedium.com
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Lonmins Future
17
19
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SOURCES:FinancialTime,Morningstar
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The Industry
Types of Internship
Graduate Program generally range in length from one to three years and may include rotational or fixed roles
within a specific department. The benefits of a graduate program include a supportive environment, an opportunity to work in a number of different roles during a rotational schedule, on-the-job training and mentoring and an emphasis on learning and development.
Who can apply? Most programs will require the applicant to have completed their degree within the previous
two years to be eligible.
Summer internship is a ten-week program designed to fully immerse you in the day-today activities of one of
our divisions. The program s usually start with a firm wide orientation where youll learn about our culture, as
well as the benefits and responsibility. Internships of being a member of the organisation. You will also receive division-specific training designed to help you succeed in your division.
After training, you will receive real responsibilities to give you a sense of what you would be doing, day to
day, as a full-time employee. Along with fellow interns, you will work alongside leaders within our industry.
Successful Summer Analysts may be invited back to join a New Analyst program in a full time position.
Who can apply? The summer analyst role is usually for candidates currently pursuing a college or university
degree and is usually undertaken during the second or penultimate year of study. While your discipline or
major are not important, they look for students with an outstanding record of academic achievement and an
interest in the financial markets.
Spring Insight week is a structured programme combining practical workshops and business presentations
with social events and networking opportunities. Youll meet people from across the bank, learn about what
different areas do and how you might fit into our organisation.
Who can apply? Students from all degree disciplines, in the first year of a three-year degree or the second
year of a four-year degree, are welcome to apply.
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Useful Websites
Through Imperial you get a free online
subscription to the FT. Use this to view articles but also use this to sign up the FirstFT,
(select your preferences), and get a summary of the daily news emailed to you.
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Do you need some guidance on how to write your resume or CV and cover letter, how to
prepare for interviews, and the proper way to respond to a job offer? Read our useful tips to
help you put your best foot forward:
Make a Good First Impression
Make a good first impression by looking like you already work here from arriving in business attire, to
greeting each of your interviewers with a professional and friendly greeting. See what our recruiters look for
in our candidates.
Follow Up
A crucial part of any interview is the impression you leave on the interviewer at the end. Youll do this by
asking relevant questions that show your aptitude for and interest in the job, and following up with thanks
and affirmation that youre ready to explore next steps.
Final Advice:
If there are any points in your resume or CV that you cant speak about persuasively and
knowledgeably in an interview, leave them off.
Do a mock interview with a friend or adviser, who can give you an honest assessment of your composure and ability to deliver information. You met a challenge, solved a problem, worked collaboratively
or initiated a project. Be prepared to give real examples of how you met a challenge, solved a problem,
worked collaboratively or initiated a project.
Articulate the benefit you brought to the project or your team
Be honest about your contributions and abilities
Relax and be yourself. The interviewer wants to make the best match possible for the firm and you.
The more he or she sees of you, the richer the conversation----and the results--will be.
The Offer
Should you receive an offer, youll want to inquire about timing, reporting structure, and other initial
expectations. You may also want to ask additional questions about the culture of working at Credit
Suisse. These are all discussions you may initiate with recruiters, alumni or others working in the sector.
Should you be fortunate enough to have more than one offer, its good protocol to make a decision as
soon as possible so that the bank(s) may consider other candidates.
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