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Present Value describes the process of determining what a cash flow to be received in the future is worth in today's dollars. Therefore, the Present Value of a future cash flow represents the amount of money today which, if invested at a particular interest rate, will grow to the amount of the future cash flow at that time in the future. The process of finding present values is called Discounting and the interest rate used to calculate present values is called the discount rate. For example, the Present Value of $100 to be received one year from now is $90.91 if the discount rate is 10% compounded annually. This can be demonstrated as follows:
One Year
$90.91(1 + 0.10) = $100 or $90.91 = $100/(1 + 0.10)
Notice that the Future Value Equation is used to describe the relationship between the present value and the future value. Thus, the Present Value of $100 to be received in two years can be shown to be $82.64 if the discount rate is 10%.
Two Years
$82.64(1 + 0.10)2 = $100 or $82.64 = $100/(1 + 0.10)2 A pattern should be becoming apparent. The following equation can be used to calculate the Present Value of a future cash flow given the discount rate and number of years in the future that the cash flow occurs. (This equation can be obtained algebraically from the Future Value Equation.)
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Where PV = Present Value CFt = Future Cash Flow which occurs t years from now r = the interest or discount rate t = the number of years
Present value:
Present value is the value on a given date of a future payment or series of future payments, discounted to reflect the time value of money and other factors such as investment risk. Present value calculations are widely used in business and economics to provide a means to compare cash flows at different times on a meaningful "like to like" basis. Present value (PV) is an accounting term that measures how money needs to be invested today in over to finance future business initiatives, projects, and obligations. In order to determine the present value of future costs, accountants use formulas based on the time value of money. This formula features variables such as the length of time involved and the prevailing interest rate. In other words, the present value of an amount to be received in the future is the discounted face value considering the length of time the receipt is deferred and the required rate of return (or appropriate discount rate under the circumstances). Present value is the result of the time value of money concept, which recognizes that today's dollar is worth more than the same dollar received at a future point in time. The current worth of a future sum of money or stream of cash flows given a specified rate of return. Future cash flows are discounted at the discount rate, and the higher the discount rate, the lower the present value of the future cash flows. Determining the appropriate discount rate is the key to properly valuing future cash flows, whether they are earnings or obligations. This sounds a bit confusing, but it really isn't. The basis is that receiving $1,000 now is worth more than $1,000 five years from now, because if you got the money now, you could invest it and receive an additional return over the five years.
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Explanation:
The calculation of discounted or present value is extremely important in many financial calculations. For example, net present value, bond yields, spot rates, and pension obligations all rely on the principle of discounted or present value. Learning how to use a financial calculator to make present value calculations can help you decide whether you should accept a cash rebate, 0% financing on the purchase of a car or to pay points on a mortgage.
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Another approach to choosing the discount rate factor is to decide the rate which the capital needed for the project could return if invested in an alternative venture. If, for example, the capital required for Project A can earn five percent elsewhere, use this discount rate in the NPV calculation to allow a direct comparison to be made between Project A and the alternative. Related to this concept is to use the firm's Reinvestment Rate. Reinvestment rate can be defined as the rate of return for the firm's investments on average. When analyzing projects in a capital constrained environment, it may be appropriate to use the reinvestment rate rather than the firm's weighted average cost of capital as the discount factor. It reflects opportunity cost of investment, rather than the possibly lower cost of capital. An NPV calculated using variable discount rates (if they are known for the duration of the investment) better reflects the real situation than one calculated from a constant discount rate for the entire investment duration. Refer to the tutorial article written by Samuel Baker for more detailed relationship between the NPV value and the discount rate. For some professional investors, their investment funds are committed to target a specified rate of return. In such cases, that rate of return should be selected as the discount rate for the NPV calculation. In this way, a direct comparison can be made between the profitability of the project and the desired rate of return. To some extent, the selection of the discount rate is dependent on the use to which it will be put. If the intent is simply to determine whether a project will add value to the company, using the firm's weighted average cost of capital may be appropriate. If trying to decide between alternative investments in order to maximize the value of the firm, the corporate reinvestment rate would probably be a better choice. Using variable rates over time or discounting "guaranteed" cash flows differently from "at risk" cash flows may be a superior methodology, but is seldom used in practice. Using the discount rate to adjust for risk is often difficult to do in practice (especially internationally), and is difficult to do well. An alternative to using discount factor to adjust for risk is to explicitly correct the cash flows for the risk elements using rNPV or a similar method, then discount at the firm's rate.
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Why It Matters:
The price-to-earnings ratio is a powerful, but limited tool. For investors, it allows a very quick snapshot of the companys finances without getting bogged down in the details of an accounting report. Let us use our previous example of XYZ, and compare it to another company, ABC. Company XYZ has a P/E of 20, while company ABC has a P/E of 10. Company XYZ has the highest P/E ratio of the two and this would lead most investors to expect higher earnings in the future than from company ABC (which possesses a lower P/E ratio). As noted earlier, the P/E ratio is limited. It does not paint the entire picture for the potential investor; rather it is a complementary tool in your financial toolbox. Be wary of forward EPS measures, (remember, EPS is an essential aspect of calculation of the P/E ratio) as they are matters of prediction and are only estimates of projected earnings. Further, trailing P/E ratios can only tell you what happened to a company in the previous time periods.
The company's future and recent performance, including potential growth; Perceived risk, including risk due to high leverage; Prospects for companies of this type, the market sector.
By dividing the price of one share in a company by the profits earned by the company per share, you arrive at the P/E ratio. If earnings per share move proportionally with share prices the ratio stays the same. But if stock prices gain in value and earnings remain the same or go down, the P/E rises. The earnings figure used is the most recently available, although this figure may be out of date and may not necessarily reflect the current position of the company. This is often referred to as a 'trailing P/E', because it involves taking earnings from the last four quarters
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Introduction of Citibank:
Citibank is a major international bank, founded in 1812 as the City Bank of New York, later First National City Bank of New York. Citibank is now the consumer and corporate banking arm of financial services giant Citigroup, one of the largest companies in the world. As of March 2007, it is the largest bank in the United States by holdings. Citibank has operations in more than 100 countries and territories around the world. More than half of its 1,400 offices are in the United States, mostly in the New York City, Chicago, Miami, and Washington DC metropolitan areas, as well as in California. In addition to the standard banking transactions, Citibank offers insurance, credit card and investment products. Their online services division is among the most successful in the field, claiming about 15 million users.
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Mission Statement
The mission of Citibank is to provide financial services to the customers based on quality and quantity products and Citibank is always ready to do innovative banking.
Vision Statement
"To be the most comprehensive financial services provider
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Retail Banking:
Retail banking deals with the individual customers and handle there accounts and provide rest of retail banking services.
Commercial banking:
Can also refer to a bank or a division of a bank that mostly deals with deposits and loans from corporations or large businesses, as opposed to normal individual members of the public.
Corporate Banking:
Corporate banking refers to only dealing with giants in different sectors. Nishat Textile Azgard-9 Banks Page 10
Corporate Bank:
The Corporate Banking Group at Citibank in Pakistan is committed to providing its clients the highest level of service possible. Recognized as a leader and a trendsetter in the financial markets, the Corporate Bank strives to achieve Citibank's global objective of customer satisfaction and quality through a well diversified product offering and a team of highly professional Relationship Managers. The Corporate Bank manages a high quality asset portfolio being an active player in many sectors including textile, sugar, leather, pharmaceutical, fertilizer, petrochemical, power, aviation, automotive, telecommunications, oil and gas distribution and fast moving consumer goods industries. Companies in their client base include leading multinational corporations, top tier local corporate organizations and public sector entities. Citibank has been instrumental in bringing together local companies with international players in several Joint Ventures. This has been possible because of Citibank's Global Relationship and transnational network.
Financial Institutions:
Through dedicated Relationship Managers, the Financial Institutions Group (FI) at Citibank is dedicated towards developing relationships with financial institutions to service their financial intermediation needs worldwide. Citibank has one of the largest correspondent banking networks which combined with their global presence and advanced technological systems makes us the premier correspondent bank. While systems and technology are an important component of global banking, their business relies on the strengths of the people dedicated to meeting your needs. With this in mind, they have organized around what they call "local/global team" a group of Citibankers who work closely together to provide you with seamless delivery of financial solutions in your own markets, as well as globally. This team includes local relationship managers, account managers at major financial centers and client services and trade services representatives. Their goal is to ensure that, when you deal with any Citibank center worldwide, you receive the same level of personalized, high quality service from individuals who know you and your business
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For example, if a company is currently trading at $43 a share and earnings over the last 12 months were $1.95 per share, the P/E ratio for the stock would be 22.05 ($43/$1.95).
EPS is usually from the last four quarters (trailing P/E), but sometimes it can be taken from the estimates of earnings expected in the next four quarters (projected or forward P/E). A third variation uses the sum of the last two actual quarters and the estimates of the next two quarters.
Present Value:
The present value of a sum of money to be received at a future date is determined by discounting the future value at the interest rate that the money could earn over the period. Starting with the future value equation: FV = PV ( 1 + i ) t where FV = future value PV = present value i = annual interest rate we see that the present value is given by: FV PV = (1+i)t
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OPERATING RESULTS
2005
2004
2003
2002
2001
(Rupees in Million)
Mark-up / Return Mark-up / Return expensed Fee, Commission, Brokerage and FX income Fund based Income Dividend and Capital Gains Total Income Provisions / write-off Operating expenses Exceptional Items Operating Profit Before tax and provision Profit before taxation Profit after tax Dividends Bonus shares
17,756 2,781
9,084 2,058
10,370 2,933
15,386 6,075
17,033 7,545
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Ratio Analysis
We have to analyze firm from five point of view. Liquidity Analysis Activity Analysis Debt Analysis Profitability Analysis Marketability Analysis
LIQUIDITY ANALYSIS It shows the firm ability to pay its short-term obligation on time.
CURRENT RATIO
2005 1: 0.74times 2006 1: 0.84times 2007 1: 0.98times
The ratios show that the banks current liabilities and current assets are almost equal. So the bank is in a position to meet its current liabilities on time.
The banks quick ratio has increased. So the banks liquid position is very strong.
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ACTIVITY ANALYSIS
DEBTOR COLLECTION PERIOD
2005 92 days 2006 87days 2007 44days
Banks credit collection performance is depended upon L/C. So the banks debtor collection period mostly depends upon the opening of letter of credit.
This ratio shows that the bank is making payment to the creditors within reasonable time period.
PROFITABILITY ANALYSIS
The efficiency of the firm can be analyzed through its profits.
Cost of goods sold has remain more or less constant while conversion rate of $ is being higher therefore G.P. is very ideal. Investment and Securities Management Page 15
The company profit is increasing with the passage of time. It is because of its 90% exports.
There is little increase in profit of the co. It is because of hiring of new employees which increases the salaries of the co.
RETURN ON ASSETS
2005 2.69% 2006 3.48% 2007 7.49%
MARKETABILITY ANALYSIS
EARNING PER SHARE
2005 Rs.2.48 2006 Rs.2.67 2007 Rs.2.82
The shareholders are earning Rs.2.82 against one share in 2007, which is more than in 2006 & 2005.
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DIVIDEND DECLARATION
2005 6.7% 2006 7.50% 2007 7.50%
LEVERAGE ANALYSIS
Leverage analysis is used to measure the degree of indebt ness (up to what extent the firm is in debtness).
DEBT RATIO
2005 57% 2006 68.78% 2007 76%
DEBT-EQUITY RATIO
2005 186% 2006 322% 2007 220%
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Citibank is paying interest 1.56times in a year, which is greater than previous years.
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SWOT Analysis
Strengths:
Have sufficient cash balances to meet customer requirements Efficient workforce to satisfy customers Latest technology adopted to make the availability of cash through ATMs There is a huge variety of products and services Companies in Pakistan prefer Citibank during international transactions because it has branches all over the world Citibank is having cutting edge technology that gives it completive edge over its competitors. There some special extra services for its clients i.e. Global Cash Letter Service which is not being offered by its competitors. It is providing diverse financial services almost in every sector.
Weaknesses:
Limited branch network High interest rates and charges for account maintenance as compared to others Corporate and consumer are operated separately in case of Citibank. Online banking website has limitations and is not good when compared with other banks No matter how old a customer one is , but he dares default once and he is in deep trouble Due to limited branches in country as well as in city, there can be long lines sometimes Sometimes cash is not properly managed so thats why customer face some problems Less advertisement results in minimum customers as compared to other banks
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Opportunities:
Citibank should penetrate further and capture various corporate customer as well as retail customer by expanding their network. open new branches is rural areas to capture market share Trust and reliability creates chances to enhance deposit and profitability. Banks deposit is increasing rapidly so there is a great opportunity to enhance its investment and financing. Changes in social patterns, population, and lifestyle changes and in economical. Mean people now thinking to deposit their money in such a sound bank. Good financial position creating a good reputation for future advances and huge deposits.
Threats:
Large and increasing competition In our country, the rate of inflation is increasing along with unemployment. So due to increase in price of the products, the saving of the people is decreasing with passage of time. So it is threat for banking sector. In future the deposits of the bank will decreases. The number of banks in Pakistan increasing with passage of time. Foreign bank like to open their branches in Pakistan. So it would be threat for Citibank.
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Conclusion:
Present Value describes the process of determining what a cash flow to be received in the future is worth in today's dollars. Therefore, the Present Value of a future cash flow represents the amount of money today which, if invested at a particular interest rate, will grow to the amount of the future cash flow at that time in the future. The process of finding present values is called Discounting and the interest rate used to calculate present values is called the discount rate If there is one number that people look at than more any other it is the Price to Earnings Ratio (P/E). The P/E is one of those numbers that investors throw around with great authority as if it told the whole story. Citibank uses P/E ratio to calculate it earning and net present value approach to reach its goal
Recommendation:
Following are the recommendation for Citibank limited Management should also open new branches is rural areas to capture market share. Management should give their customer good mark up rate. Inward collection is received twice a day; in morning and evening. It should be reduced to one because even if employees complete their work in the early hours, they have to wait for the second collection. Steps should be taken to ensure the regular and efficient work of systems. Advertise to introduce itself with the resident person
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References:
http://stocks.about.com/od/evaluatingstocks/a/pe.htm http://www.zenwealth.com/BusinessFinanceOnline/TVM/PresentValue.html
Book:
Investment thirteen edition by Charles P. Jones
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