Fin 331 Chapter 12

Market Risk

Behavior of investors in the market. Market risk is reflected in the price volatility of a security

Interest Rate Risk

Change in rate will impact fixed-income securities such as bonds: rate increases, value will decrease; rate decrease, value will increase

Purchasing Power Risk

Changes in the general level of prices can impact ability of firm to operate

Financial Risk

Concerns the amount of debt used to finance a firm and the ability of the firm to meet their obligations on time.

Current income

Dividends from stock, interest from bonds, or rents from real estate

Book Value

Firms Assets less Liabilities less preferred stock, amount available to common shareholders

Price Earnings Ratio [P/E]

Market price of common stock divided by the earnings per share; Measure of investor confidence and expectations

Earnings per Share [EPS]

Measure of earnings available to common stock shareholders on a per share basis. Can be compared to other corporations

Rate of Return

Minimum rate of return an investor feels should be earned in compensation for the amount of risk assumed

Net Profit Margin

Net profit divided by sales, higher net profit margin, the more money the company earns. Should be stable or better increasing

Capital Gains

Realization of change in market value by selling security

Liquidity Risk

Risk of not being able to liquidate an investment conveniently and at a reasonable price

Risk-free rate of return

The rate of return on short-term government securities, such as Treasury Bills, that is free from any type of risk.

Event Risk

The risk that some major, unexpected event will occur that leads to a sudden and substantial change in the value of an investment. Risks tend to be confined to specific company or industry.

Interest-on-interest

To earn a fully compounded rate of return, the interest earned must be invested at same rate

Beta

an indication of a stock's price volatility, it shows how responsive the stock is to changes in the overall stock market

Return on Equity

net income divided by shareholders' equity, a measure of the firm's overall profitability. Should be stable or better increasing

Business Risk

the variability surrounding the firm's cash flows and subsequent ability to meet operating expenses on time.