Scotia in Dubai

Today, Scotia Mocatta gained approval to operate it's own branch in Dubai to provide gold and price hedging services.

This will certainly be an interesting story to follow both for the implications of gold and the region.

The price of gold seems to be particularly noteworthy, having dropped to below 1100 yesterday for the first time in a while.

Dubai Stock Exchanges Merge

Dubai Financial Market announced today that they will be merging with Nasdaq Dubai for $121M. Also, the troubles with their debt might not yet be over as Dubai World may have to continue to restructure their debt.

There are certainly many interesting events in the area with a lot of activity in this market. It will certainly be worth while to see how the restructuring in the market will manifest and effect other markets around the world.

24h Strategy Case Comp

Yesterday at Rotman we had the 24 hour case competition (mandatory as part of our Strategy Class with Anita McGahan, shown above) with all the first year MBAs.

There were 49 teams of 5 or 6 students each in 7 rooms (7 teams per presentation room competiting against each other in the first round). We were assigned teams and asked to work on and present the case in 24 hours with newly assigned teams (not our teams from Q1-Q2).

I got assigned to a great team: Francois, James P., Miranda and Selina and we managed to place third in the competition overall!

Q2 - Done and Done

One way or another, we are done the dreaded Q2. Tonight, we are heading down to Grace O'Malleys and partying with the second years and others. It promises to be a good night. A good good night.

Mechanics of Retirement Planning

A question I posed to some of my classmates who wanted to practice DCF or time value of money questions:

John is 20 years old and is making $100k annually. He plans on retiring at 65 and will require 70% of his current annual income every year thereafter. The general life expectancy is 'til 85. And he can earn 8% on any money he invests.

How much does John need to save per year in order to retire at 65 according to plan?

[Solution]
You would break this question into two parts.

Part I: Nest Egg - Understanding the PV of the money he needs in retirement (aka how much he needs to have saved by 65)
Using a financial calculator:
PV = ?

FV = 0 (Doesn't plan on giving any inheritance when he dies)
PMT = 70,000 (70% of 100k)
P/Y = 1 (1 period per year, NOT semi-annual)
I/Y = 8
N = 20 (Retires and lives for 20 years, 85 - 65)
PV = 687,270.32 (How much his nest egg should be at 65)

Part II: How much he needs to invest every year
PMT = ?

FV = PV @ 65 = 687,270.32 (How much his nest egg should be at 65)
P/Y = 1
I/Y = 8
N = 45 (Works for 45 years, 65 - 20)
PV = 0 (Starts with nothing)
PMT = 1,778.16

John needs to save 1,778.16 per year. Now most people will say: "That seems really low"

That's true, but look at the scenario: John is saving for 45 years and spending for 20 years. For all of those 65 years, John is earning 8% on every dollar he's invested (aka he's not using). This returns to our original point when it comes to personal finance: "You can buy stocks. You can buy bonds. You can even buy good advice. But the one thing you can't buy is time."

Inventory Turnover - An Alternative

I was thinking about Inventory Turnover (and other similar accounts and operating / activity ratios) when I noticed what I thought were some assumptions that were made that might not be appropriate for all business types.

Recall: The formula for Inventory Turnover is: COGS / Average Inventory

For intance, if you look at an annual report this is what you see regarding inventory:
You get only two numbers regarding the ending balance last year (beginning balance this year) and the ending balance this year. The assumption is that the inventory gradually increased from it's last year's value to this year's value. So we take the value of the area under the graph to produce an average Inventory (Area divided by time).
Rather than calculate the area under the graph of an awkward trapezoid, an easy way to do this is to approximate the volume by taking the average of the two points and taking the area of the resulting rectangle (assuming the line above is straight, this is an exact approximation).
However, while this assumption might be a good approximation for most businesses, this inventory model isn't appropriate for many other types of businesses. Which kinds? I would argue businesses where design is important the inventory takes a much different shape (as shown below):Which types of business might exhibit this behaviour? I would suggest two candidates would be clothing stores or automotive dealers. Why? Because they often shift their inventory for new models every year. Their inventory levels will spike starting at the beginning of the year and then towards the end they will sell out all their inventory to reduce carrying costs and get rid of "old" inventory which will be harder to sell (or sell at a discount etc).

The point I'm trying to make is that if you use the previous (generally accepted) model, you will be underestimating your inventory turnover model because your ending reported inventory is not an accurate reflection of your "average" inventory carried throughout the year.

In the same way some people might cheat a stock price by invoking a "window dressing" price (deliberately bidding up the last trade of the day to inflate the close, I think that if you aren't aware of how the inventory moves throughout the year, you might be in danger of accepting a "window dressing" inventory value.

ICUP

I know it's the eve of the finance exam and most people are expecting me to do finance posts. I'm sure I'll oblige later. But first, I need to make a comment regarding exams and people going to the washroom. What is it about exams where people suddenly have weak bladders? During exams, whether they be MBA or CFA, there are always people getting up to go the washroom.

During today's MCV exam, at the 45 minute mark when people were officially allowed to use the rest room facilities, a few hands immediately went up to use the facilities. I have to admit I do find it mildly hilarious. I don't think I've ever used the facilities during an exam. I think it's a bit creepy and childish to have to be escorted by an exam proctor.