1
00:00:00,000 --> 00:00:10,000
Alan Cring Productions in association with Emergent Light Studio presents

2
00:00:10,000 --> 00:00:18,000
the Illinois State Collegiate Compendium, academic lectures in business and economics.

3
00:00:18,000 --> 00:00:29,000
This is business finance, FIL 341 for Autumn Semester 2024.

4
00:00:29,000 --> 00:00:32,000
Today, additional funds needed.

5
00:00:32,000 --> 00:00:49,000
I had built and was going to deploy this on Tuesday, but I just was not comfortable with my model at that point.

6
00:00:49,000 --> 00:00:54,000
And this is an Excel spreadsheet that you will be able to download yourselves

7
00:00:54,000 --> 00:01:05,000
and use as you wish for homework or just to get a better feel for this part of finance.

8
00:01:05,000 --> 00:01:11,000
Now this is actually what we're going to do today, and it won't take a whole class period,

9
00:01:11,000 --> 00:01:16,000
but I do want to go through it in enough detail so that you understand how this works.

10
00:01:16,000 --> 00:01:23,000
First things first, this is not a complete model of how you find additional funds that you're going to need,

11
00:01:23,000 --> 00:01:25,000
but it is pretty darn close.

12
00:01:25,000 --> 00:01:29,000
There are a few nuances that I'll bring up along the way with this,

13
00:01:29,000 --> 00:01:37,000
but it actually is in the borderline between corporate and investment.

14
00:01:37,000 --> 00:01:44,000
It is corporate because you're determining, doing a forecast of how much money or capital

15
00:01:44,000 --> 00:01:49,000
or combination of those you are going to need for the next period.

16
00:01:49,000 --> 00:01:59,000
Now this one focuses primarily on capital funds.

17
00:01:59,000 --> 00:02:02,000
I'm sorry, I kind of glitched out there.

18
00:02:02,000 --> 00:02:08,000
But all you have to do is you can say not all of what we'll need will be capital.

19
00:02:08,000 --> 00:02:16,000
We can also add a cash buffer or another one I'll bring up later is we can actually drain off some of our cash

20
00:02:16,000 --> 00:02:18,000
to provide additional funds.

21
00:02:18,000 --> 00:02:20,000
Those are possibilities as well.

22
00:02:20,000 --> 00:02:25,000
But aside from that, this is just sort of the block model that I'll be doing.

23
00:02:25,000 --> 00:02:31,000
But just to show you where it is and just if you want to bring it up right now so you can have it,

24
00:02:31,000 --> 00:02:38,000
is go into spreadsheets, it's AFN, additional funds needed, and just download it.

25
00:02:38,000 --> 00:02:40,000
Now you can tweak this.

26
00:02:40,000 --> 00:02:50,000
I would kind of encourage you to, if you're going to save, save a copy instead of saving over the thing itself.

27
00:02:50,000 --> 00:02:54,000
But it's AFN and we'll be using it after we look at the numbers.

28
00:02:54,000 --> 00:02:58,000
And you'll see that it is daunting.

29
00:02:58,000 --> 00:03:02,000
It looks daunting at first, but it is actually not hard.

30
00:03:02,000 --> 00:03:06,000
And I patterned it after the one that you see in the textbook.

31
00:03:06,000 --> 00:03:14,000
It's different, but it's just enough the same that you can look at the textbook to see some of the details

32
00:03:14,000 --> 00:03:18,000
if it's not clear from the spreadsheets that I've built here.

33
00:03:18,000 --> 00:03:23,000
But this is just sort of like the numbers all come out to be pretty clean at least at first,

34
00:03:23,000 --> 00:03:25,000
and then they get a little hairy later.

35
00:03:25,000 --> 00:03:30,000
But anyway, that's where we are heading right now.

36
00:03:30,000 --> 00:03:38,000
But as I said, first a look at the numbers as we always do just so we can see what's going on.

37
00:03:38,000 --> 00:03:45,000
Now this might not look like a spectacular day, but it is a turnaround from the bear market.

38
00:03:45,000 --> 00:03:53,000
If you've got a real bear market, when we say a bear market, that's more than a day, that's more than a week.

39
00:03:53,000 --> 00:03:56,000
It's an enduring thing.

40
00:03:56,000 --> 00:04:03,000
We're seeing a bull day, and yeah, you can have bulls in a bear market, and you can have bears in a bull market.

41
00:04:03,000 --> 00:04:10,000
But there is at least some reason to believe that we have enough of a bull day here

42
00:04:10,000 --> 00:04:15,000
that it kind of broke the bear mentality on the street.

43
00:04:15,000 --> 00:04:23,000
Now interestingly enough, as you can see, the Tao is still taking the brunt of the punishment of the bears right now.

44
00:04:23,000 --> 00:04:25,000
And there's actually good reason for that.

45
00:04:25,000 --> 00:04:30,000
Some of those blue-chip stocks, the companies are not doing all that great.

46
00:04:30,000 --> 00:04:38,000
And that's not really so much the economy, as analysts say, this is these companies really not performing up to what we would expect.

47
00:04:38,000 --> 00:04:51,000
The behemoths like Intel, Microsoft, even Apple are not really showing that they have what it takes to have robust growth over the foreseeable future.

48
00:04:51,000 --> 00:04:56,000
However, the S&P 500, notice here that the bears did make a run.

49
00:04:56,000 --> 00:04:58,000
See that dip down there?

50
00:04:58,000 --> 00:05:04,000
The bears made a run around midday, and they were beaten back.

51
00:05:04,000 --> 00:05:08,000
The bulls came back and just started scooping up bargains again.

52
00:05:08,000 --> 00:05:13,000
So that is something that we can take cheer in if nothing else.

53
00:05:13,000 --> 00:05:16,000
And the price of crude is dropping again.

54
00:05:16,000 --> 00:05:22,000
That's good news because that's hopefully cheaper fuel prices down the road.

55
00:05:22,000 --> 00:05:24,000
So that's always a yay.

56
00:05:24,000 --> 00:05:27,000
The gold bugs are in a good mood today.

57
00:05:27,000 --> 00:05:29,000
They think something bad is about to happen.

58
00:05:29,000 --> 00:05:40,000
So whatever, that's the bulls and gold that are having the time of their lives and all that kind of stuff.

59
00:05:40,000 --> 00:05:50,000
But anyway, now let me take you over here just for a quickie look at yields and probably seeing something grim.

60
00:05:50,000 --> 00:05:52,000
Ooh, look at that.

61
00:05:52,000 --> 00:05:55,000
Yields, oh, that's a pretty decent drop.

62
00:05:55,000 --> 00:05:57,000
So far, five basis points today.

63
00:05:57,000 --> 00:06:03,000
So we have some good news there with the yields on the bonds going down.

64
00:06:03,000 --> 00:06:10,000
They're not ready to break below four obviously right now, but still they're going down.

65
00:06:10,000 --> 00:06:12,000
And so we can be happy.

66
00:06:12,000 --> 00:06:13,000
Excuse me.

67
00:06:13,000 --> 00:06:17,000
The yields are at least peeling backward a little bit in the bond market.

68
00:06:17,000 --> 00:06:20,000
And that's going to be good for the economy.

69
00:06:20,000 --> 00:06:30,000
What concerns us is when the yields just keep going up, that's what gives the banks the impetus to start jacking up mortgage rates,

70
00:06:30,000 --> 00:06:34,000
car loan rates, loans to corporations and all of that.

71
00:06:34,000 --> 00:06:46,000
So the fact that we now have this turnaround is going to take that excitement off the banks to jack up their interest rates.

72
00:06:46,000 --> 00:06:56,000
And as long as it just keeps going down, then what's most likely that will be a sign that the banks will probably not be making many loans

73
00:06:56,000 --> 00:07:03,000
until consumers, businesses, and the banks know where this is all going to end up.

74
00:07:03,000 --> 00:07:06,000
Are we going to finally start seeing a slide in interest rates again?

75
00:07:06,000 --> 00:07:11,000
Probably, but we've got to wait for everyone to think that's what's going on.

76
00:07:11,000 --> 00:07:19,000
Now, interestingly, the Nikkei, even when it's having a bull day, it's not anything to write home about.

77
00:07:19,000 --> 00:07:26,000
What I hear is Tokyo is in something of a recession.

78
00:07:26,000 --> 00:07:39,000
And Japan's central bank has talked about lowering their interest rates, trying to get interest rates down to stimulate the economy.

79
00:07:39,000 --> 00:07:43,000
So far, it hasn't really juiced their economy much.

80
00:07:43,000 --> 00:07:53,000
So Japan is in kind of a funk, and that's what you're seeing here in the Nikkei 225, just that overall malaise in the Japanese economy.

81
00:07:53,000 --> 00:07:58,000
And of course, London, it went up and then it just slid right back down.

82
00:07:58,000 --> 00:08:06,000
They're about to close out the day, and they'll be lucky if they stay above water before they bell over there in London.

83
00:08:06,000 --> 00:08:08,000
So there's that.

84
00:08:08,000 --> 00:08:13,000
But like I said, the good news is that we do have some strength.

85
00:08:13,000 --> 00:08:20,000
And if you just look at some of the ones that we usually look at, banks, that's interesting.

86
00:08:20,000 --> 00:08:24,000
BAC should be down, but I can't swear to that, really.

87
00:08:24,000 --> 00:08:28,000
BAC should be down.

88
00:08:28,000 --> 00:08:29,000
Oh, look at that.

89
00:08:29,000 --> 00:08:31,000
Well, barely up.

90
00:08:31,000 --> 00:08:35,000
It's really kind of a dead day on the street.

91
00:08:35,000 --> 00:08:40,000
Something like, let's look at Koliapalmov.

92
00:08:40,000 --> 00:08:42,000
What's the other one?

93
00:08:42,000 --> 00:08:45,000
Oh, I wanted to look at retail grocers.

94
00:08:45,000 --> 00:08:50,000
There is a shakeup happening rather noticeably in the retail grocery market.

95
00:08:50,000 --> 00:09:01,000
Several old grocery chains you might not have heard of because they are regionals in the South and in the West, but they're buckling.

96
00:09:01,000 --> 00:09:13,000
And it's a little bit troubling now that these old, fairly well diversified, regionally diversified stores are beginning to slip away.

97
00:09:13,000 --> 00:09:17,000
And Kroger is one of them.

98
00:09:17,000 --> 00:09:23,000
But Kroger is not going to go away, but it is taking some pretty big grief right now.

99
00:09:23,000 --> 00:09:30,000
It's underpriced according to this, according to the P-E ratio, it's underpriced.

100
00:09:30,000 --> 00:09:39,000
But looking on another one, and we're talking about retail grocers here, wait.

101
00:09:39,000 --> 00:09:42,000
No, that's not what I wanted.

102
00:09:42,000 --> 00:09:46,000
Why did I do that, Walmart?

103
00:09:46,000 --> 00:09:54,000
Even Walmart's in kind of a malaise right now, but a lot of it's just this is not a good time.

104
00:09:54,000 --> 00:10:01,000
What we're hoping for is that these numbers are going to start looking better in the Christmas season than they do now.

105
00:10:01,000 --> 00:10:04,000
Target has been showing not very much.

106
00:10:04,000 --> 00:10:07,000
Oh, look at that. Today, Target actually came up a little bit.

107
00:10:07,000 --> 00:10:14,000
So there's some good news there, but you have other sectors that just don't seem to want to do much right now.

108
00:10:14,000 --> 00:10:21,000
So anyway, the bottom line is that this is kind of a difficult market.

109
00:10:21,000 --> 00:10:30,000
Now, before I go to the topic today, do you all know what I mean by a short sale, by short selling?

110
00:10:30,000 --> 00:10:34,000
Have you ever heard? Some of you are nodding your heads.

111
00:10:34,000 --> 00:10:36,000
Well, let me get a poll of this.

112
00:10:36,000 --> 00:10:39,000
Do you know how to do a short sale?

113
00:10:39,000 --> 00:10:46,000
Okay, I'm going to show you, but I want to make sure I'm not telling everyone something you already know.

114
00:10:46,000 --> 00:10:49,000
Have you ever done a short sale, madam?

115
00:10:49,000 --> 00:10:52,000
Can I say that you have? Okay.

116
00:10:52,000 --> 00:10:58,000
Okay, now most people and I, this is getting you out of the textbook for just a few minutes

117
00:10:58,000 --> 00:11:07,000
and getting you some extra knowledge that makes my FIL 341 a little richer than the typical one.

118
00:11:07,000 --> 00:11:14,000
But here's the thing.

119
00:11:14,000 --> 00:11:23,000
There is a common sentiment, even among investors, especially nonprofessional investors,

120
00:11:23,000 --> 00:11:28,000
that you make money when stocks go up, you lose money when stocks go down.

121
00:11:28,000 --> 00:11:30,000
Actually, you can make money either way.

122
00:11:30,000 --> 00:11:32,000
And I'm not talking about options, call and put options.

123
00:11:32,000 --> 00:11:34,000
I'm talking about just stocks themselves.

124
00:11:34,000 --> 00:11:41,000
Obviously, if you buy a stock and the stock goes up in price, you get a capital gain and you get a dividend.

125
00:11:41,000 --> 00:11:46,000
Oh, everything's looking good.

126
00:11:46,000 --> 00:11:49,000
That's what most people think.

127
00:11:49,000 --> 00:11:52,000
And if stocks go down, boo-hiss, there goes my pension fund,

128
00:11:52,000 --> 00:12:02,000
or there goes my little investment I was making so I could put a down payment on a car and all that.

129
00:12:02,000 --> 00:12:05,000
But in fact, there is the other side of the market.

130
00:12:05,000 --> 00:12:07,000
You can go long or you can go short.

131
00:12:07,000 --> 00:12:12,000
Long means buy, short means kind of like a sell.

132
00:12:12,000 --> 00:12:17,000
I caution you that this is going to be a very simplified example of it.

133
00:12:17,000 --> 00:12:23,000
And I also caution you that in order to participate in short sales, you must have a margin account.

134
00:12:23,000 --> 00:12:32,000
In other words, your brokerage account has to have a certain amount of money in it in case something nasty happens.

135
00:12:32,000 --> 00:12:38,000
Because the worst that can happen when you buy is that you lose your investment.

136
00:12:38,000 --> 00:12:46,000
The worst that can happen if you short sell is that your ask can be reclaimed by the great ether.

137
00:12:46,000 --> 00:12:50,000
And again, this is going to be a very simplified example of it.

138
00:12:50,000 --> 00:12:52,000
And I will dispense with a couple.

139
00:12:52,000 --> 00:12:55,000
I'll mention them and then I'll step away from them.

140
00:12:55,000 --> 00:12:57,000
But here's how it works.

141
00:12:57,000 --> 00:13:14,000
Let's take DRL, common stock, currently at $35 a share.

142
00:13:14,000 --> 00:13:17,000
Now you think that that stock is going to fall.

143
00:13:17,000 --> 00:13:20,000
You say, yeah, it's going to go up there, sky's the limit.

144
00:13:20,000 --> 00:13:23,000
But you think it's going to drop.

145
00:13:23,000 --> 00:13:31,000
And let's say that you have what we might call a cover trigger, a cover point of $30 a share.

146
00:13:31,000 --> 00:13:38,000
In other words, if it gets that low, well, by God, I've made my money and I'm getting out before it turns around the other way.

147
00:13:38,000 --> 00:13:44,000
In other words, you need to have a point in mind where enough is enough.

148
00:13:44,000 --> 00:13:46,000
I'm getting out of this.

149
00:13:46,000 --> 00:13:50,000
And there's a good reason for it, too.

150
00:13:50,000 --> 00:13:55,000
The first thing, you think that it's going to fall to $30 a share.

151
00:13:55,000 --> 00:14:07,000
So what you do is you borrow 100 shares DRL.

152
00:14:07,000 --> 00:14:09,000
First thing you do is borrow.

153
00:14:09,000 --> 00:14:11,000
Now you're saying, who do I borrow from?

154
00:14:11,000 --> 00:14:12,000
You don't.

155
00:14:12,000 --> 00:14:14,000
It's just out there.

156
00:14:14,000 --> 00:14:16,000
There is not someone that you borrow it from.

157
00:14:16,000 --> 00:14:19,000
There's not some institution you borrow it from.

158
00:14:19,000 --> 00:14:24,000
You just borrow 100 shares because there's a vast ocean of shares out there.

159
00:14:24,000 --> 00:14:28,000
And you're just borrowing 100 of DRL.

160
00:14:28,000 --> 00:14:32,000
You go and your broker will take care of that for you.

161
00:14:32,000 --> 00:14:47,000
And then you immediately sell those 100 shares DRL at the price of $35.

162
00:14:47,000 --> 00:14:51,000
Now that will net you $3,500.

163
00:14:51,000 --> 00:14:54,000
You say, wait a minute, how does this work?

164
00:14:54,000 --> 00:15:00,000
Well, first of all, when you borrow those shares, every day that you hold those,

165
00:15:00,000 --> 00:15:07,000
you have that open borrowed position, you are going to pay interest on it, on that position.

166
00:15:07,000 --> 00:15:13,000
So remember that the longer that you keep those borrowed shares out there in the short position,

167
00:15:13,000 --> 00:15:18,000
the more that accumulates that cost of the position.

168
00:15:18,000 --> 00:15:25,000
And I'm going to ignore it for this, but keep in mind that that is a real motivation to cover soon.

169
00:15:25,000 --> 00:15:37,000
So let's say now that DRL actually does fall to $30 a share.

170
00:15:37,000 --> 00:15:50,000
So what you do is you buy 100 shares of DRL at $30 a share.

171
00:15:50,000 --> 00:15:57,000
So that means that you are out now 30 times 100 or out $3,000.

172
00:15:57,000 --> 00:16:04,000
You buy those and you pay back those to where that you borrowed.

173
00:16:04,000 --> 00:16:08,000
In other words, you're covering your position.

174
00:16:08,000 --> 00:16:11,000
You finished up, game over, that's the end of the story.

175
00:16:11,000 --> 00:16:16,000
And so without talking about fees or that interest that you were accumulating,

176
00:16:16,000 --> 00:16:22,000
how many days it took you to get it down there, you waited.

177
00:16:22,000 --> 00:16:25,000
You're up $500.

178
00:16:25,000 --> 00:16:31,000
That's how you make money on stock price falls.

179
00:16:31,000 --> 00:16:35,000
That's a short.

180
00:16:35,000 --> 00:16:37,000
Okay, first things first.

181
00:16:37,000 --> 00:16:41,000
Keep in mind, again, I'm going to emphasize this enough,

182
00:16:41,000 --> 00:16:47,000
is that there is that interest payment per day that you're going to be accumulating on that position.

183
00:16:47,000 --> 00:16:52,000
So you're going to want to cover as soon as you can.

184
00:16:52,000 --> 00:17:00,000
Now also notice that if DRL goes up, you're screwed because you will eventually panic

185
00:17:00,000 --> 00:17:05,000
and you will cover at 37, 38 just to get the hell out.

186
00:17:05,000 --> 00:17:11,000
Because if the stock price goes up, you're going to have to buy back at a higher price.

187
00:17:11,000 --> 00:17:15,000
And so you're going to wipe out that $3,500.

188
00:17:15,000 --> 00:17:19,000
If it goes to 38, well, then you say, okay, that's it.

189
00:17:19,000 --> 00:17:22,000
That's it. I got to get out because it's going up and it's not going to go back down.

190
00:17:22,000 --> 00:17:25,000
So at that point, you cover at 38.

191
00:17:25,000 --> 00:17:35,000
And so you lose $300 plus you probably waited a few days, three, four, five days.

192
00:17:35,000 --> 00:17:43,000
And so you were accumulating that interest cost, hoping to God that it turned around and went down.

193
00:17:43,000 --> 00:17:47,000
Okay, now a couple of pieces of terminology.

194
00:17:47,000 --> 00:17:52,000
And of course, they don't keep the bookmarks they think I really want in this.

195
00:17:52,000 --> 00:17:55,000
So I'll have to go and get it again.

196
00:17:55,000 --> 00:18:11,000
Now there are a couple of different places you can look at short positions.

197
00:18:11,000 --> 00:18:14,000
NASDAQ has one.

198
00:18:14,000 --> 00:18:21,000
And I hate it because theirs has a little more information, but it's really old information.

199
00:18:21,000 --> 00:18:28,000
It's like last time I checked it was like at the end of September, what was going on then.

200
00:18:28,000 --> 00:18:35,000
But I've never looked at this thin tail.

201
00:18:35,000 --> 00:18:37,000
I don't know.

202
00:18:37,000 --> 00:18:39,000
See, there's some information that I'm hoping for.

203
00:18:39,000 --> 00:18:48,000
Oh, stop it. Of course, I'm a human, you toad.

204
00:18:48,000 --> 00:18:51,000
That's not going to help me. That's a little too confusing there.

205
00:18:51,000 --> 00:18:54,000
Let me go back here.

206
00:18:54,000 --> 00:18:58,000
Okay, I'll just go the NASDAQ tracker.

207
00:18:58,000 --> 00:19:01,000
I hate this one because it's just so lame.

208
00:19:01,000 --> 00:19:04,000
But there are a couple of things.

209
00:19:04,000 --> 00:19:11,000
The first thing is the short interest outstanding or short interest.

210
00:19:11,000 --> 00:19:18,000
How many shares of the company are out there in a short position?

211
00:19:18,000 --> 00:19:21,000
So let's look at say Tesla.

212
00:19:21,000 --> 00:19:26,000
And I hate how late how how.

213
00:19:26,000 --> 00:19:28,000
Oh, that's right.

214
00:19:28,000 --> 00:19:30,000
Click that.

215
00:19:30,000 --> 00:19:32,000
This will show you up.

216
00:19:32,000 --> 00:19:37,000
See, NASDAQ for all that they used to be, they are so behind now.

217
00:19:37,000 --> 00:19:44,000
But this is how many shares on September 30th.

218
00:19:44,000 --> 00:19:49,000
How many shares of Tesla were in a short position?

219
00:19:49,000 --> 00:19:55,000
The bigger, the more bearish the sentiment is behind the scenes.

220
00:19:55,000 --> 00:20:03,000
Keep in mind that a stock as it's going up, usually you'll see the short interest going up too.

221
00:20:03,000 --> 00:20:08,000
Because there will be this belief that it will top out and turn back over.

222
00:20:08,000 --> 00:20:16,000
So you'll have shorters coming in to take their positions betting on the turnaround going down.

223
00:20:16,000 --> 00:20:20,000
So Tesla, as you can see, that's a hell of a lot of shares.

224
00:20:20,000 --> 00:20:22,000
And that's one company.

225
00:20:22,000 --> 00:20:27,000
Think of all the hundreds of thousands of companies out there, public companies.

226
00:20:27,000 --> 00:20:29,000
That's just one.

227
00:20:29,000 --> 00:20:34,000
So the aggregate short interest is something that's kind of interesting to us.

228
00:20:34,000 --> 00:20:40,000
Because as that short interest grows overall for all companies,

229
00:20:40,000 --> 00:20:48,000
that says that there's market sentiment that is thinking there's a lot of market sentiment that's thinking that it's going to have.

230
00:20:48,000 --> 00:20:55,000
There's going to be a pretty big drop in price of us of overall the stock markets.

231
00:20:55,000 --> 00:20:57,000
So that's an important thing here.

232
00:20:57,000 --> 00:21:06,000
Now, one thing that I hate on these is they don't show you another one that's important.

233
00:21:06,000 --> 00:21:11,000
And I'll put this in parentheses because almost no one says that.

234
00:21:11,000 --> 00:21:14,000
The short float.

235
00:21:14,000 --> 00:21:19,000
That's the percentage of the company's stock that is in short position.

236
00:21:19,000 --> 00:21:21,000
And they don't report it for Tesla.

237
00:21:21,000 --> 00:21:30,000
So if Tesla had a billion shares, then its float would be 7.4%.

238
00:21:30,000 --> 00:21:36,000
The short float is important to the extent that it can get ridiculous.

239
00:21:36,000 --> 00:21:44,000
I've seen the float get to 70%, 80% was in short.

240
00:21:44,000 --> 00:21:52,000
Now, in other words, that many shorters on that stock were out there.

241
00:21:52,000 --> 00:21:59,000
That percentage of the shareholders of the corporation were betting against the stock.

242
00:21:59,000 --> 00:22:01,000
Possibly.

243
00:22:01,000 --> 00:22:03,000
That's a scary number.

244
00:22:03,000 --> 00:22:06,000
Now, here's the bad part.

245
00:22:06,000 --> 00:22:10,000
Now, this is how it can turn really nasty.

246
00:22:10,000 --> 00:22:16,000
Suppose that the stock price keeps going up and up,

247
00:22:16,000 --> 00:22:21,000
and you see more and more shorters coming in thinking, yeah, it's going to peak, going to peak.

248
00:22:21,000 --> 00:22:26,000
And the float gets bigger and bigger, and it doesn't.

249
00:22:26,000 --> 00:22:30,000
Well, you've got all these people who are holding cover.

250
00:22:30,000 --> 00:22:34,000
See on Tesla here, one day to cover.

251
00:22:34,000 --> 00:22:42,000
In other words, right now, it's taking only one day for the shorts to say, I'm covering.

252
00:22:42,000 --> 00:22:44,000
That's a sign that the stock price is going down.

253
00:22:44,000 --> 00:22:46,000
They're covering, and they're out.

254
00:22:46,000 --> 00:22:53,000
They've made some money, and they leave after a day in this position.

255
00:22:53,000 --> 00:22:55,000
That's decent.

256
00:22:55,000 --> 00:23:08,000
If it gets to be five, seven, ten days to cover, that is a sign that something is, that they're going to get killed.

257
00:23:08,000 --> 00:23:14,000
Because you see, after a certain amount of time, you get a mass freakout effect.

258
00:23:14,000 --> 00:23:24,000
Because let's say that you've got 70% of the float, and the stock keeps going up and up.

259
00:23:24,000 --> 00:23:31,000
And all these people are sitting there, paying interest every day, waiting for it to go down.

260
00:23:31,000 --> 00:23:36,000
Well, some son of a bitch is going to say, all right, I'm out.

261
00:23:36,000 --> 00:23:41,000
And all it takes is a few of them all at once to say, I'm out.

262
00:23:41,000 --> 00:23:43,000
And they cover.

263
00:23:43,000 --> 00:23:48,000
And then, okay, look at the place where you cover.

264
00:23:48,000 --> 00:23:51,000
You have to buy the stock to cover.

265
00:23:51,000 --> 00:23:59,000
So if you suddenly start having a few shorters covering themselves, that pushes the price up.

266
00:23:59,000 --> 00:24:02,000
The other shorters say, oh shit, it's going up.

267
00:24:02,000 --> 00:24:04,000
And they start getting out.

268
00:24:04,000 --> 00:24:15,000
And then you have a herd, essentially something that qualifies as the hordes of Genghis Khan, all buying at once to cover.

269
00:24:15,000 --> 00:24:19,000
And all of them buying at once is going to drive the price through the roof.

270
00:24:19,000 --> 00:24:31,000
And you've got a whole lot of shorters who are very, very sad because they are covering at way above the price that they sold it at.

271
00:24:31,000 --> 00:24:32,000
They've got to buy it.

272
00:24:32,000 --> 00:24:35,000
And when they buy it, every buy pushes the price up.

273
00:24:35,000 --> 00:24:41,000
And if a whole bunch of those son of a dogs buy it, they're going to drive the price through the roof.

274
00:24:41,000 --> 00:24:46,000
And then everyone is destroyed in the process as that happens.

275
00:24:46,000 --> 00:24:47,000
That's how a short position.

276
00:24:47,000 --> 00:24:49,000
That's the dark side of a short.

277
00:24:49,000 --> 00:24:53,000
Now, I'm sure you've never heard of this stock.

278
00:24:53,000 --> 00:24:58,000
It's this lousy little company called GameStop.

279
00:24:58,000 --> 00:25:01,000
Yeah, you have heard of it, haven't you?

280
00:25:01,000 --> 00:25:10,000
GameStop was a favorite whipping boy of a couple of disreputable SOBs on the street.

281
00:25:10,000 --> 00:25:14,000
They would short GameStop every couple of weeks.

282
00:25:14,000 --> 00:25:21,000
They'd just take these big positions in GameStop because they just knew the stock price was going to go down.

283
00:25:21,000 --> 00:25:24,000
And so it was like guaranteed money.

284
00:25:24,000 --> 00:25:32,000
And they would oftentimes, the rumor was, that they would help it go down by passing out another nasty rumor about GameStop.

285
00:25:32,000 --> 00:25:34,000
Oh, man, I hear it's almost about to go to bankruptcy.

286
00:25:34,000 --> 00:25:36,000
Oh, God.

287
00:25:36,000 --> 00:25:38,000
Yeah, it's unbelievable how bad it is.

288
00:25:38,000 --> 00:25:49,000
Of course, that would drive the price down and they would cover their shorts and make themselves a couple of hundred, five hundred thousand dollars, a million dollars.

289
00:25:49,000 --> 00:25:54,000
Then this terrible thing happened.

290
00:25:54,000 --> 00:26:07,000
This place, this cesspool on the Internet called Reddit, and I am on Reddit, there was a subreddit called Wall Street Bets where they were saying, you should buy this stock.

291
00:26:07,000 --> 00:26:17,000
And there was an analyst who was making note of something ancient that from my time, a ratio that wasn't being paid attention to.

292
00:26:17,000 --> 00:26:21,000
And she, 26 years old, she was really bright.

293
00:26:21,000 --> 00:26:28,000
I've begun to follow her recommendations a little bit, or at least follow her blog.

294
00:26:28,000 --> 00:26:32,000
She said, GameStop is not going to go bankrupt.

295
00:26:32,000 --> 00:26:39,000
GameStop, if it gets a good management team in there, it is, the sky is the limit.

296
00:26:39,000 --> 00:26:50,000
And so, put those two forces together and suddenly all of these Redditors and their mothers and their cousins started buying GameStop, drove it sky high.

297
00:26:50,000 --> 00:26:53,000
And these Wall Street boys were just sitting there.

298
00:26:53,000 --> 00:26:55,000
They weren't even paying attention.

299
00:26:55,000 --> 00:27:02,000
And before they knew it, they were covering at a loss of several million dollars.

300
00:27:02,000 --> 00:27:04,000
It was spectacular.

301
00:27:04,000 --> 00:27:15,000
Especially because after the blood had flowed, these Wall Street boys were demanding that Congress pass legislation that they can't talk about stocks on Reddit.

302
00:27:15,000 --> 00:27:18,000
And they said, gee, weren't you the free marketers?

303
00:27:18,000 --> 00:27:23,000
And now you want government to regulate these scoundrels?

304
00:27:23,000 --> 00:27:45,000
But anyway, yeah, it can turn, sometimes when it turns nasty, it turns nasty on the people who were making their coin, just driving stock prices down so that they could profit on the cover on short positions they were taking.

305
00:27:45,000 --> 00:27:46,000
So there's that.

306
00:27:46,000 --> 00:27:48,000
That is a short sale.

307
00:27:48,000 --> 00:27:50,000
That's enough about short.

308
00:27:50,000 --> 00:27:56,000
But first things first, and that's why I hate this, because they don't show the float.

309
00:27:56,000 --> 00:28:05,000
And the second thing about it is, well, that's the big thing that I don't like is what percent of the stock is in that position.

310
00:28:05,000 --> 00:28:12,000
But 1% or rather like that, a 1 is a decent one.

311
00:28:12,000 --> 00:28:17,000
Let me try this.

312
00:28:17,000 --> 00:28:22,000
Ford.

313
00:28:22,000 --> 00:28:23,000
What?

314
00:28:23,000 --> 00:28:25,000
Okay, fine.

315
00:28:25,000 --> 00:28:30,000
We'll do GM.

316
00:28:30,000 --> 00:28:32,000
Search.

317
00:28:32,000 --> 00:28:36,000
Oh, for heaven's sake, Nasdaq, come on.

318
00:28:36,000 --> 00:28:37,000
Let's get real.

319
00:28:37,000 --> 00:28:38,000
Whoops, I meant to.

320
00:28:38,000 --> 00:28:41,000
Let me see if I can find another service that's better.

321
00:28:41,000 --> 00:28:43,000
Short tracker.

322
00:28:43,000 --> 00:28:44,000
That's UK.

323
00:28:44,000 --> 00:28:50,000
I don't want to do that.

324
00:28:50,000 --> 00:28:52,000
FINRA.

325
00:28:52,000 --> 00:29:03,000
I wonder if FINRA has anything better.

326
00:29:03,000 --> 00:29:04,000
Loading.

327
00:29:04,000 --> 00:29:11,000
Oh.

328
00:29:11,000 --> 00:29:13,000
They're not reporting it either.

329
00:29:13,000 --> 00:29:15,000
This is kind of depressing.

330
00:29:15,000 --> 00:29:16,000
And look at that.

331
00:29:16,000 --> 00:29:19,000
They're not reporting any better than Nasdaq was.

332
00:29:19,000 --> 00:29:21,000
Oh, well, you got the idea.

333
00:29:21,000 --> 00:29:26,000
So if you want to walk on the wild side, you can make money on short positions.

334
00:29:26,000 --> 00:29:31,000
But remember, this is a one-night stand.

335
00:29:31,000 --> 00:29:35,000
Don't get married to a position hoping that it will improve.

336
00:29:35,000 --> 00:29:43,000
It's sort of like you get into a relationship and your significant partner turns into a werewolf.

337
00:29:43,000 --> 00:29:46,000
Okay, well, I'm just going to wait this out.

338
00:29:46,000 --> 00:29:50,000
Tomorrow, my partner will be nice and loving and normal again.

339
00:29:50,000 --> 00:29:55,000
But every night, I'm going to eat your loins and soul.

340
00:29:55,000 --> 00:29:57,000
Get out.

341
00:29:57,000 --> 00:30:00,000
Don't hold shorts too long.

342
00:30:00,000 --> 00:30:04,000
And make sure that you have, to a certain extent, see that one right there?

343
00:30:04,000 --> 00:30:06,000
That is not a tight trigger.

344
00:30:06,000 --> 00:30:08,000
That's a nasty trigger.

345
00:30:08,000 --> 00:30:15,000
A trigger, I mean, you're going to do fine if you have triggers of a couple of dollars a share.

346
00:30:15,000 --> 00:30:21,000
Just make sure, don't have, unless you're absolutely sure that the stock is going to go to hell,

347
00:30:21,000 --> 00:30:24,000
make it a trigger like 33, 32.

348
00:30:24,000 --> 00:30:32,000
You won't make as much money, but at least it's got a better chance of going to 33 or 32 than it does of going clear down to 30.

349
00:30:32,000 --> 00:30:34,000
Just the last piece of advice.

350
00:30:34,000 --> 00:30:39,000
Now, AFN, additional funds needed.

351
00:30:39,000 --> 00:30:44,000
And I've made this spreadsheet for you folks to have and to use.

352
00:30:44,000 --> 00:30:48,000
And this is a pretty trivial example, but you can put real numbers in there.

353
00:30:48,000 --> 00:30:52,000
And this is more or less how it's done.

354
00:30:52,000 --> 00:30:54,000
You can put some complications in.

355
00:30:54,000 --> 00:31:01,000
The first thing that you're going to want to do is get a nice income statement and some additional information,

356
00:31:01,000 --> 00:31:05,000
the dividends and additional retained earnings, addition to retained earnings,

357
00:31:05,000 --> 00:31:09,000
how many shares are outstanding, all that good stuff, and a few ratios.

358
00:31:09,000 --> 00:31:13,000
And a tax rate for your troubles.

359
00:31:13,000 --> 00:31:26,000
Once you have gotten all of that into place, and also you'll have a balance sheet too that will give some of the same information.

360
00:31:26,000 --> 00:31:29,000
Now, you notice something that I do here.

361
00:31:29,000 --> 00:31:31,000
I have common size.

362
00:31:31,000 --> 00:31:41,000
In other words, these percentages are the percentages of sales.

363
00:31:41,000 --> 00:31:47,000
And then on the balance sheet, these are the percentages of total assets.

364
00:31:47,000 --> 00:31:49,000
These are just common size.

365
00:31:49,000 --> 00:31:54,000
Now, the purpose of the common size is a starting point.

366
00:31:54,000 --> 00:31:58,000
You can use these percentages for the next year's forecast.

367
00:31:58,000 --> 00:32:06,000
You forecast revenues, and then all of the numbers come out of the revenues as percentages.

368
00:32:06,000 --> 00:32:14,000
So in other words, if this goes up to 80,000, then everything would be the same percentage of 80,000.

369
00:32:14,000 --> 00:32:17,000
You don't have to do it this way, though.

370
00:32:17,000 --> 00:32:20,000
You can actually alter these percentages.

371
00:32:20,000 --> 00:32:24,000
You can say, well, that SG&A sucks.

372
00:32:24,000 --> 00:32:25,000
As you can see, it does here.

373
00:32:25,000 --> 00:32:27,000
That's 90%.

374
00:32:27,000 --> 00:32:29,000
Yeah, that's a terrible SG&A.

375
00:32:29,000 --> 00:32:34,000
So you might declare 80% next year is the target for that.

376
00:32:34,000 --> 00:32:39,000
80% of sales, not 90%, 80% of sales.

377
00:32:39,000 --> 00:32:49,000
And that will trickle down here to a higher net income, you hope, net operating income pre-tax, and then at the end your net income.

378
00:32:49,000 --> 00:32:51,000
You can target these.

379
00:32:51,000 --> 00:32:52,000
You can put in another one.

380
00:32:52,000 --> 00:32:58,000
You could also say, let's see, let's make all of these industry standards.

381
00:32:58,000 --> 00:33:02,000
In other words, let's see what the industry is for all of these percentages.

382
00:33:02,000 --> 00:33:03,000
Easy to do.

383
00:33:03,000 --> 00:33:10,000
You go to Standard Board of Global Net Advantage, and they'll tell you percentages compared to the industry.

384
00:33:10,000 --> 00:33:13,000
Nothing hard about this part.

385
00:33:13,000 --> 00:33:16,000
Now I'm going to keep pushing you here a little bit.

386
00:33:16,000 --> 00:33:18,000
And you can put in a tax rate.

387
00:33:18,000 --> 00:33:21,000
Now technically it should be 21% right now.

388
00:33:21,000 --> 00:33:23,000
I just used 25% there.

389
00:33:23,000 --> 00:33:28,000
But now again, the balance sheet, the same thing.

390
00:33:28,000 --> 00:33:35,000
You can forecast next year's by taking the percentages off the total assets for next year.

391
00:33:35,000 --> 00:33:39,000
Or you can set new targets.

392
00:33:39,000 --> 00:33:49,000
In this case, you notice there are a couple of things that I'm looking at here, deficiencies that concern me somewhat about this.

393
00:33:49,000 --> 00:33:54,000
My assets here, well, I shouldn't say.

394
00:33:54,000 --> 00:33:57,000
Cash is a little bit on the thin side.

395
00:33:57,000 --> 00:34:01,000
It looks like they have some illiquidity here.

396
00:34:01,000 --> 00:34:04,000
But we're not going to criticize them now, for now.

397
00:34:04,000 --> 00:34:18,000
But now over here, one thing I want to point out, and again, you can use next year's total assets with this year's, the current percentages,

398
00:34:18,000 --> 00:34:20,000
and get all of these numbers.

399
00:34:20,000 --> 00:34:30,000
So whatever that new total assets you want to set it at, you just take 25.35% of it, and you get your accounts payable and all that, all the way down the line.

400
00:34:30,000 --> 00:34:35,000
This has a name that is more common.

401
00:34:35,000 --> 00:34:39,000
You may not have heard this name before, but if you take my 340 class, you will hear it.

402
00:34:39,000 --> 00:34:46,000
It's called spontaneous liabilities, or spontaneous short-term liabilities.

403
00:34:46,000 --> 00:35:00,000
Another term for it is spontaneous financing, because this is money that other companies or your workers or whatever are giving you.

404
00:35:00,000 --> 00:35:03,000
You're not paying them, so they're financing your operations.

405
00:35:03,000 --> 00:35:08,000
So the term that we use in cash management is this is spontaneous financing.

406
00:35:08,000 --> 00:35:15,000
I think your book uses the term spontaneous liabilities or spontaneous current liabilities, something like that.

407
00:35:15,000 --> 00:35:20,000
But it is actually part of your financing package.

408
00:35:20,000 --> 00:35:26,000
And as I told you, this is actually, you want this to be good.

409
00:35:26,000 --> 00:35:34,000
You want to put off paying your bills, and you want to accelerate collecting your accounts receivable.

410
00:35:34,000 --> 00:35:39,000
Those decrease your cash conversion cycle.

411
00:35:39,000 --> 00:35:48,000
Now, obviously, you're going to piss off your suppliers if you don't pay them.

412
00:35:48,000 --> 00:35:57,000
But as a matter of fact, if you look at a company like Walmart, its accounts payable and accruables, its spontaneous financing,

413
00:35:57,000 --> 00:36:05,000
is so huge that literally its suppliers finance all of its short-term operations.

414
00:36:05,000 --> 00:36:15,000
Literally. Walmart suppliers finance all of Walmart and some extra into long-term assets.

415
00:36:15,000 --> 00:36:17,000
It's that severe.

416
00:36:17,000 --> 00:36:25,000
And that puts Walmart in the category of geniuses who are assholes.

417
00:36:25,000 --> 00:36:29,000
It's a special category.

418
00:36:29,000 --> 00:36:36,000
But anyway, okay, so now I'm going to take you through just some ratios that we care about. Operating costs over sales.

419
00:36:36,000 --> 00:36:42,000
These are ratios that you have seen some of these, but these are more specialized for calculating.

420
00:36:42,000 --> 00:36:48,000
They have more meaning, and some of them you wouldn't see typically in a usual find the ratio of,

421
00:36:48,000 --> 00:36:54,000
no, these are more things that we need to do if we're going to forecast financial need.

422
00:36:54,000 --> 00:36:58,000
And operating costs over sales.

423
00:36:58,000 --> 00:37:04,000
Now look at this one. This one is bloody for this company. It is awful.

424
00:37:04,000 --> 00:37:08,000
A healthy number, it depends on the industry.

425
00:37:08,000 --> 00:37:13,000
But I get a little bit overly excited if I see that above 60%.

426
00:37:13,000 --> 00:37:22,000
This company is essentially, almost all of its sales revenue is being absorbed by operating costs.

427
00:37:22,000 --> 00:37:25,000
And that's just a terrible situation.

428
00:37:25,000 --> 00:37:29,000
Now depreciation over fixed assets.

429
00:37:29,000 --> 00:37:33,000
And this is accumulated depreciation.

430
00:37:33,000 --> 00:37:38,000
Well, no, this is current depreciation over your fixed assets.

431
00:37:38,000 --> 00:37:52,000
How much are you shaving off this year, but in general, how much are you shaving off your fixed asset value, book value, through depreciation?

432
00:37:52,000 --> 00:38:01,000
You don't certainly want that to get too high, because what that means is that you don't have a whole lot of fixed assets, a book value left.

433
00:38:01,000 --> 00:38:05,000
And what you have left, you're depreciating the hell out of it.

434
00:38:05,000 --> 00:38:09,000
You're driving toward a book value of zero on your assets.

435
00:38:09,000 --> 00:38:13,000
So you don't want this to be a very high number.

436
00:38:13,000 --> 00:38:16,000
Now in this case, I did not, and I apologize for that.

437
00:38:16,000 --> 00:38:21,000
These black numbers, those are the industry averages. Those are industry averages in here.

438
00:38:21,000 --> 00:38:27,000
So you can see that actually, this is a high operating cost industry.

439
00:38:27,000 --> 00:38:36,000
But even at that, this company has even higher operating costs than the typical company does as a percent of sales.

440
00:38:36,000 --> 00:38:42,000
And cash over sales, this is apparently an industry that is illiquid.

441
00:38:42,000 --> 00:38:48,000
They maintain very tight cash balances, or liquid balances, I should say.

442
00:38:48,000 --> 00:38:57,000
Now the receivables and the percent of sales, that is a little higher than the industry.

443
00:38:57,000 --> 00:39:08,000
Remember that your receivables is revenue that you have recognized and that you have paid taxes on, but you have not gotten that money.

444
00:39:08,000 --> 00:39:17,000
Right now, I'm driving into the end of the year, and my receivables, I'll just tell you the number I'm projecting now,

445
00:39:17,000 --> 00:39:26,000
but I'm seeing total sales of about $18,000. My receivables are disgraceful 12% of that.

446
00:39:26,000 --> 00:39:34,000
I'm sorry, $12,000. I've got out there. I'm paying taxes on the 18 grand,

447
00:39:34,000 --> 00:39:42,000
but I have got only about six grand in my pocket to pay those taxes.

448
00:39:42,000 --> 00:39:46,000
The rest, God knows when those scoundrels are going to pay me.

449
00:39:46,000 --> 00:39:52,000
Okay, inventory over sales. This is fairly close to the industry average.

450
00:39:52,000 --> 00:40:00,000
Remember that inventory allows you to be able to deliver to the customer as fast, very quickly.

451
00:40:00,000 --> 00:40:03,000
We've got it in the warehouse, we'll get it to you.

452
00:40:03,000 --> 00:40:07,000
The downside is that the more inventory you have, the more you pay for it.

453
00:40:07,000 --> 00:40:17,000
Warehouse space, security, lighting, heating, insurance is a big thing these days for inventory,

454
00:40:17,000 --> 00:40:23,000
and it gets pretty bad because a lot of insurance companies are, they'll say,

455
00:40:23,000 --> 00:40:29,000
well, yeah, we have standard policies and premiums for this, this, and this, but this is unusual.

456
00:40:29,000 --> 00:40:33,000
We'll have to put you into an excess line, and that'll be a very expensive premium.

457
00:40:33,000 --> 00:40:37,000
So that insurance can begin to bite you in the butt on this.

458
00:40:37,000 --> 00:40:43,000
Fixed assets to sales, well, they certainly, the over sales,

459
00:40:43,000 --> 00:40:51,000
they certainly have a lot of fixed assets compared to sales relative to the industry.

460
00:40:51,000 --> 00:40:57,000
They are overburdened to a certain extent with fixed assets compared to their sales.

461
00:40:57,000 --> 00:41:05,000
In other words, their fixed assets are not generating sales as much as is typical in the industry.

462
00:41:05,000 --> 00:41:13,000
So then we would go down to the accounts payable, another was spontaneous financing as a percent of sales.

463
00:41:13,000 --> 00:41:20,000
Theirs is high, and these are actually kind of made up numbers, but that's a little bit difficult.

464
00:41:20,000 --> 00:41:23,000
Okay, the equity multiplier.

465
00:41:23,000 --> 00:41:29,000
Basically, all this is doing is telling you how many times over your company

466
00:41:29,000 --> 00:41:42,000
it has magnified your base of what you've got from those investors, those equity investors.

467
00:41:42,000 --> 00:41:49,000
Then over total assets, you notice here this is a highly leveraged company compared to its industry.

468
00:41:49,000 --> 00:41:53,000
They borrow a lot compared to their industry.

469
00:41:53,000 --> 00:41:57,000
If their sales are not good, that would explain it.

470
00:41:57,000 --> 00:42:07,000
They're using a lot of their, they're using a lot of money, borrowed money to cover all the assets they've built.

471
00:42:07,000 --> 00:42:10,000
Total liabilities over total assets.

472
00:42:10,000 --> 00:42:17,000
This is a company that is, if you look at the TL over TA, above 50%, this is a highly leveraged company.

473
00:42:17,000 --> 00:42:20,000
That means it's a very risky company.

474
00:42:20,000 --> 00:42:25,000
And this times interest earned, that is a consequence, that's a low number.

475
00:42:25,000 --> 00:42:33,000
They can cover their interest with the money available for them to cover it only three and a three quarters times over.

476
00:42:33,000 --> 00:42:36,000
That is a consequence of all of their debt.

477
00:42:36,000 --> 00:42:39,000
They're borrowing a lot of money.

478
00:42:39,000 --> 00:42:43,000
So these common sizes are doing a lot to help us.

479
00:42:43,000 --> 00:42:45,000
ROA sucks.

480
00:42:45,000 --> 00:42:48,000
This is because they have their return on assets.

481
00:42:48,000 --> 00:42:50,000
Their fixed assets are huge.

482
00:42:50,000 --> 00:42:51,000
See this over here?

483
00:42:51,000 --> 00:42:54,000
That's what's driving that ROA down.

484
00:42:54,000 --> 00:42:58,000
Remember, ROA is net income over fixed assets.

485
00:42:58,000 --> 00:43:10,000
Going to sales over assets, you can clearly see, as I had said before, that those fixed assets are not generating a whole lot in sales.

486
00:43:10,000 --> 00:43:13,000
They're not generating as much as the industry average.

487
00:43:13,000 --> 00:43:22,000
Now the price earnings ratio, this is indicating to us that the price, the market just does not like this stock.

488
00:43:22,000 --> 00:43:30,000
They've got an earning, they've got earnings, no question about it, but the market is not impressed by those earnings.

489
00:43:30,000 --> 00:43:39,000
Operating profit ratio, obviously lower because of all those SG&A expenses.

490
00:43:39,000 --> 00:43:46,000
The capital ratio is high because they've got so many fixed assets.

491
00:43:46,000 --> 00:43:53,000
And the return on invested capital, well, they're not making enough money for all that money that was put into the company.

492
00:43:53,000 --> 00:43:58,000
And the book has these formulas, and you can certainly see them when you go over here to the spreadsheet.

493
00:43:58,000 --> 00:44:02,000
You can see how I construct them in the spreadsheet.

494
00:44:02,000 --> 00:44:04,000
But now, here we go.

495
00:44:04,000 --> 00:44:18,000
The pro forma, the pro forma income statement, I brought the numbers, the percentages over from 19, from 2023, and I just plopped them right there.

496
00:44:18,000 --> 00:44:26,000
And then I just took their projected sales and then took these percentages onto the new projected sales.

497
00:44:26,000 --> 00:44:32,000
In other words, these are the same ratios that they had last year, percentages.

498
00:44:32,000 --> 00:44:37,000
Now, you can change those. Well, we don't want 90%. We want 80%, by God, things like that.

499
00:44:37,000 --> 00:44:40,000
You can change those ratios.

500
00:44:40,000 --> 00:44:48,000
But I'm just starting you out with the ones from last year to create just a basic set of pro forma income statements and balance sheets.

501
00:44:48,000 --> 00:44:53,000
And a few other numbers around here that we're going to just toss in.

502
00:44:53,000 --> 00:45:00,000
You could put about anything you want in here as long as you're being realistic.

503
00:45:00,000 --> 00:45:03,000
So it's just one of those things. You can do what you want.

504
00:45:03,000 --> 00:45:06,000
Now, here, this is a number that drives this one.

505
00:45:06,000 --> 00:45:15,000
We're going to say that the company is going to increase its sales by 10% in 2024.

506
00:45:15,000 --> 00:45:20,000
You can make that number whatever you want. You can make it smaller. You can make it larger.

507
00:45:20,000 --> 00:45:32,000
Remember that the smaller you make it, the more you're continuing the suck that was their income statements from last year and balance sheet from last year.

508
00:45:32,000 --> 00:45:42,000
The higher you make it, ultimately, that's going to increase the AFN, the additional funds needed by the company.

509
00:45:42,000 --> 00:45:49,000
And then, of course, with a company that's already in so much debt and their price is so low,

510
00:45:49,000 --> 00:45:55,000
that's not a very happy situation. They're already leverage 53%, 54%.

511
00:45:55,000 --> 00:46:02,000
Their price is already in the toilet from the P-E ratio. So they don't have a whole lot of room to grow.

512
00:46:02,000 --> 00:46:10,000
They're boxing themselves in a bad way. Now, the balance sheet, my ass, what did I do there?

513
00:46:10,000 --> 00:46:15,000
I don't know why that balance sheet turned nasty. I may have to fix it before you want to download it.

514
00:46:15,000 --> 00:46:22,000
Okay, now, these are the numbers. AFN is just a formula, additional funds needed.

515
00:46:22,000 --> 00:46:30,000
And there is the formula right there. And all you need are the growth and sales.

516
00:46:30,000 --> 00:46:38,000
Well, we've said 10% by reference. The sales last year, well, we got those. We just do that one by reference.

517
00:46:38,000 --> 00:46:47,000
The assets last year, we've got those, the total assets. Now, here's where I bring in that term spontaneous liabilities.

518
00:46:47,000 --> 00:46:57,000
The spontaneous liabilities, that was the accounts payable plus accruals, and that's that number right there.

519
00:46:57,000 --> 00:47:04,000
Now, here is where I forecast that number is the sales, forecast sales.

520
00:47:04,000 --> 00:47:14,000
And then increase in the sales is 7,200. That number doesn't look right. I should have, did I do that right?

521
00:47:14,000 --> 00:47:19,000
Pro forma, actually, I could just do that as, let me do this.

522
00:47:19,000 --> 00:47:38,000
Equals sales last year times 1 plus 0.10, close those parentheses.

523
00:47:38,000 --> 00:47:45,000
There we go. Increase in sales, 7,200 dollars.

524
00:47:45,000 --> 00:47:55,000
So, the profit margin, it will just fall out on its own. All that is net income divided by sales.

525
00:47:55,000 --> 00:48:03,000
And then you do a couple of ratios, assets over sales. And you do your payout ratio.

526
00:48:03,000 --> 00:48:07,000
Now, in this case, the payout ratio is 1 minus the dividend ratio.

527
00:48:07,000 --> 00:48:20,000
The dividend ratio is how much they paid in dividends over here, how much they paid in dividends divided by the earnings net income.

528
00:48:20,000 --> 00:48:26,000
So, that's the dividend ratio, and the payout ratio is 1 minus that.

529
00:48:26,000 --> 00:48:32,000
And so, we come out with the payout ratio, and we get spontaneous liabilities divided by sales.

530
00:48:32,000 --> 00:48:38,000
We're going to need that. Now, let me explain the formula to you fairly briefly.

531
00:48:38,000 --> 00:48:51,000
Now, you're going to take the assets to sales, and then you're going to multiply that times the change in the sales.

532
00:48:51,000 --> 00:49:00,000
And then you're going to take out your spontaneous liabilities divided by your sales, times the change in sales.

533
00:49:00,000 --> 00:49:07,000
And then you're going to take the profit margin times 1 minus the payout ratio.

534
00:49:07,000 --> 00:49:11,000
So, in other words, this is the money that the company gets to keep.

535
00:49:11,000 --> 00:49:21,000
The profit margin, the amount of money that the company gets to keep, times 1 minus what they pay out in dividends.

536
00:49:21,000 --> 00:49:29,000
And this is their additional financing needed, 1,909 dollars and 4 cents.

537
00:49:29,000 --> 00:49:34,000
Now, the one thing that you would want to ask yourself is where are they going to do that?

538
00:49:34,000 --> 00:49:39,000
Where are they going to get that money? If they get it from debt, we look at the formula.

539
00:49:39,000 --> 00:49:43,000
Well, I don't know why that's cracked up like that.

540
00:49:43,000 --> 00:50:02,000
It wasn't a few minutes ago. SB8 over B8. Oh, B8 equals, I can fix that easily enough,

541
00:50:02,000 --> 00:50:20,000
the balance sheet times 1 plus, I apologize for that, I don't know, 10%. I could do that more elegantly.

542
00:50:20,000 --> 00:50:25,000
Oh, balance sheet, let me do that again.

543
00:50:25,000 --> 00:50:33,000
Equals the balance sheet, this was the pro forma balance sheet.

544
00:50:33,000 --> 00:50:41,000
Where's my pro forma balance sheet? Where the hell did my pro forma balance sheet go?

545
00:50:41,000 --> 00:50:47,000
Ha! You aren't going to do this because somehow my pro forma balance sheet has disappeared.

546
00:50:47,000 --> 00:50:54,000
That's why that isn't feeding in properly. I'll fix that before this is over though.

547
00:50:54,000 --> 00:51:00,000
Let me do something here. That is the pro forma balance sheet.

548
00:51:00,000 --> 00:51:19,000
Equals the balance sheet from 2003, total assets, times, open parentheses, 1 plus 0.10, close the parentheses.

549
00:51:19,000 --> 00:51:27,000
There we go. That was rude. Yeah, okay. So there we go.

550
00:51:27,000 --> 00:51:31,000
I don't know why that did that. I'll have to re-upload that.

551
00:51:31,000 --> 00:51:42,000
But anyway, there you go. So the bottom line though is, they have got a lot of debt already sitting in their portfolio.

552
00:51:42,000 --> 00:51:53,000
And if they finance that 1, 9, let me do that real quick here. I'm just going to do a quick scratch calculation here of the AFN.

553
00:51:53,000 --> 00:52:02,000
I'm going to take, this would be, AFN over debt.

554
00:52:02,000 --> 00:52:16,000
And let me see what that is. That would equal additional financing required divided by what they've got in debt right now.

555
00:52:16,000 --> 00:52:28,000
Right here. And that's a percentage for heaven's sakes. Okay, percent.

556
00:52:28,000 --> 00:52:38,000
They would have to increase their debt leverage 12% to finance their additional financing needs with debt.

557
00:52:38,000 --> 00:52:47,000
That would be, that's a lot of increase. They're going to pay a very high interest rate to leverage themselves out that far.

558
00:52:47,000 --> 00:52:59,000
But again, the price of the stock is sucking right now. So we could even look at AFN over equity.

559
00:52:59,000 --> 00:53:05,000
Equity. Oops, I mean slash equity.

560
00:53:05,000 --> 00:53:18,000
And take that over here and say this number divided by their projected equity next year, total common equity.

561
00:53:18,000 --> 00:53:29,000
It looks to me like if I were a betting kind of person, they probably, it's better if they use equity at this point.

562
00:53:29,000 --> 00:53:39,000
Because that additional financing needed would increase their equity contribution, capital only 7.3%.

563
00:53:39,000 --> 00:53:46,000
And if you use debt to do it, that increases your debt percentage by 12, more than 12%.

564
00:53:46,000 --> 00:53:54,000
So the bottom line here is that it looks as if even though the stock price sucks based upon that price earnings ratio,

565
00:53:54,000 --> 00:54:03,000
selling stock is probably going to be the best way that they can do what they need to, get what they need to accomplish.

566
00:54:03,000 --> 00:54:12,000
So that, and let me save that. That is how you do an additional financing required calculation.

567
00:54:12,000 --> 00:54:16,000
Now there are a few homework problems that you can use this into.

568
00:54:16,000 --> 00:54:22,000
And I would recommend you go through, get comfortable with the model, and then use that.

569
00:54:22,000 --> 00:54:31,000
And then I will add some more meat to this in the next couple of lectures saying, okay, what if we do it this way or that way?

570
00:54:31,000 --> 00:54:36,000
There are a couple of other ways we can get out of this trap that this company is in.

571
00:54:36,000 --> 00:54:40,000
But none of them are going to be quite very desirable.

572
00:54:40,000 --> 00:54:53,000
But anyway, that's all I have for you right now. I thank you.