SERIES 65-MORE TERMS TO MEMORIZE
Issue a bond
- Current A - Total L - Working capital **NOT shareholder's equity
Issue common stock
- Current A increases - Working capital increases - Net worth increases
Pay a dividend
- Current A will decrease - Current L will decrease - Net work decreases -Working capital does not change!
Declare cash dividend
-Current L increases - Working capital decreases - Total liabilities increases
CAPM
CAPM = Risk-free rate + (market return - risk-free rate) X beta used to determine the required rate of return
Capitalization
Capitalization = net worth + long-term debt
Decrease in net income
Caused by: - Increase in taxes - Interest on bank loans (NOT cash dividend because paid out of retained earnings)
Issues bonds, all of the following would be affected EXCEPT A) working capital. B) total assets. C) total liabilities. D) shareholder's equity.
D) shareholder's equity - Increase in cash = increasing current assets (and thus total assets). - long-term liabilities increase reflecting the debt (and thus total liabilities) - Working capital increases because of the increase in current assets. Shareholder's equity, or net worth, is only affected by the sale of new equity securities or by any profit or loss generated by the corporation.
Debt to equity ratio
Debt to equity ratio = long-term debt / capitalization (net worth + long-term debt)
Gross Margin
Gross Margin = revenue - cost of goods sold / revenue
Gross margin ratio
Net revenue - Cost of goods sold / Net revenue
A measurement of investment return that takes INFLATION into consideration
Real rate of return
gross margin
Revenue - cost of goods sold
Bond's duration
Sensitivity (to interest rate changes) long duration = more sensative
Sharpe Ratio
Sharpe Ratio = average return - risk free rate / standard deviation Also called risk-adjusted return
net present value
The difference between the sum of the discounted cash flows that are expected from an investment and its initial cost.
book value per share
Uses: I.Goodwill II.Long-term debt III.Retained earnings IV.Par value of the preferred stock
Dividend payout ratio
dividends paid per share / earnings per share
Keynesian
encourages a government to spend money to move the economy into an expansionary phase
One of the critical components of making suitable recommendations is the ability to evaluate risk. Risk measurement tools would include all of the following EXCEPT: beta sharpe ratio standard dev future value
future value - measures time value of money
The future value of an invested dollar is dependent upon
interest rate it earns over a period of time
A measurement of investment return that takes the TIME VALUE OF MONEY into consideration is
internal rate of return (IRR)
Standard deviation
measures volatility
Cash flow operations
net income + depreciation expense (only from income statement)
A financial ratio used by some analysts to help determine if a company's stock is over or undervalued is
price to book value ratio
The financial ratio that shows the relationship between the price of a company's stock and the company's net worth (stockholders' equity) is the
price to book value ratio
A measurement of investment return that takes RISK into consideration
risk-adjusted return or sharpe raito rate - risk free rate / standard dev