Series 66 Unit 10
Mode
Measure of central tendency which measures the most common value in a distribution of #'s.
Median
Measure of central tendency. Midpoint of a distribution. List in order and find the middle. If there is an even amount, take the 2 in the middle and add them then divide by 2 and use the average.
Alpha Computation:
(total portfolio return- risk free rate) - (portfolio beta x [market return - risk free rate]) Portfolio Return 10% Risk-free Rate 2% Market Return rate 8% Beta 1.2 10%-2%=8%. Then 1.2 x (8-2) 6=7.2 8 - 7.2=.08 (positive)
Earnings Per Share (EPS)
A measure of the net income earned on each share of common stock; computed as net income minus preferred dividends (earnings available to common) divided by the average number of common shares outstanding during the year.
Standard Deviation (SD)
A measure of variability that indicates the average difference between the scores and their mean. A measure of volatility of an investment's projected returns, computed by using the historical performance data. The higher, the larger the security's returns are expected to deviate from it's average return and hence the greater the risk. A security will vary within one SD about 2-3 pf the time and within two SD's about 95% of the time. 7.5 SD means that for a given period may vary by 7.5% above or below it's predicted return about 2/3(67%) of the time and within 15% about 95% of the time.
Mean or arithmetic mean
Average measure of central tendency. Will always be HIGHER than the geometric mean.
Mid-Range
Computation of the range divided by 2
Quick Asset Ratio (Acid Test Ratio)
Current assets - inventory divided by current liabilities Stricter test for analyst to use to determine the co's ability to meet it's short term obligations. OR add ALL current liabilities (except inventory) and then divide by current liabilities.
NPV Net Pre
Difference between present value and it's cost. Is expressed in dollar amounts and not as a rate of return. Generally considered more important than IRR.
The quickest way to identify IRR versus NPV:
IRR is expressed as a % , NPV never is. NPV is expressed as a $.
Geometric Mean
Measure of central tendency obtained by multiplying all numbers together and then taking the nth root (where n is the count of #'s), uses imputed compounding. It will ALWAYS be lower than the mean unless all of the #'s are the same.
Range
Measure of central tendency which is the difference between the highest and lowest returns in the sample being viewed. Put the #'s in order from lowest to highest. Subtract the 1st # from the last #.
Exhausting the Principal
Multiply the total investment amount by 100 + the ROR then subtract the annual income. Repeat until $ amount can no longer supply income at the level requested. Easy estimate, divide the initial principal, $100,000 by the annual income $12,000, ex: 100/12=8.33 then choose the next higher choice since the account is earning 5% on whatever assets remain.
return on stockholders' equity
Net income divided by average total equity measures the efficiency of common shareholders' investment or equity in the firm.
Calculate Alpha:
Portfolio Return 10% Risk-free Rate 2% Market Return rate 8% Beta .8 10 - 2 = 8 then .8 x (8-2) 6 = 4.8 8 - 4.8 = 3.2 positive alpha
Using NPV tp evaluate a projected income stream:
Project the cash flow and then discount them to their present value at the investor's required rate of return. A positive # is a worthwhile addition to the investor's portfolio.
Book Value Per Share
Represents the liquidating value of the company.(Tangible assets-liabilities-par value of preferred)/shares of common stock outstanding
Required Rate of Return (RRR)
Sometimes called the discount rate. When an investments IRR is equal, the NPV is zero. In an efficient market, bonds should be priced so that their NPV is zero.
Internal Rate of Return (IRR)
The discount rate (r) that makes the NPV of an investment equal to zero. Method of computing long-term returns that takes into consideration time value of money. YTM of a bond reflects its IRR. Determined by iteration. Takes into consideration the time value of money. Limited use to companies paying stable dividends.
Future Value (FV)
the amount of money in the future that an amount of money today will yield, given prevailing interest rates, a compounded rate of return. Equals Present value (PV) X (1+R). Compound as needed for amount of years
Rule of 72
The number of years it takes for a certain amount to double in value is equal to 72 divided by its annual rate of interest. Divide 72 by the interest rate to get the # of years. Also divide 72 by the # of years to get the required earnings rate to double money.
Debt to Equity Ratio
Total capitalization / Long-term debt
Present Value (PV)
the current value of future cash flows discounted at the appropriate discount rate Equals Future Value (FV) / (1 + R) compound as needed for amount of years
Central Tendency
Usually described as the center or middle of a distribution. Most commonly used is mean (average).
Risk-Free Rate
Will always be the 91 day (or 13 week) U.S. Treasury bill. T-bills are said to have a beta of zero.
Net Present Value (NPV)
a computation taking into consideration future cash flows, discounted to the present, and comparing that to the capital investment necessary to obtain those flows. It is always expressed in monetary units and, if positive, indicates a potentially worthwhile investment.
Dividend payout ratio
annual dividends per common share / Earnings per share
Earnings per share after dilution
assumes all convertible securities have been converted. In most cases, there will be more common stock outstanding which will cause the EPS to be reduced/diluted.
price-to-book-value ratio
compares the company's market price with its book value per share. The higher the ratio, the greater premium the public is willing to pay over the intrinsic value of the enterprise. Usually, a ratio of less than 1 indicates an undervalued company.
Current Ratio
current assets divided by current liabilities the higher the ratio, the more liquid the company
EPS if market price & P/E Ratio are known
current market price of common stock / P/E Ratio
P/E Ratio
current market price per share/earnings per share Growth companies higher than cyclical
Factors that decrease working capital include:
declaring cash divs paying off long term debt whether at majurity or if called, earlier net operating losses
Factors that increase working capital include:
issuing securities (long-term debt or equity) profits from business operations sale on non-current assets such as equipment no longer in use
profitability ratio
measures the gross profitability of the firm's business operations Gross profit divided by net sales
Income in Perpetuity
method of providing annual income "forever". Divide the ANNUAL income amount by the rate of return to arrive at the lump sum required to produce the income perpetually.
A correlation coefficient of zero means
that the two stocks will move independently. They may move in the same direction, or they may not. The zero correlation coefficient indicates that there is no pattern to the relationship between their price movements.
three components of present value
total amount needed, earnings rate, and length of investment.
Gross margin, or margin of profit, pre-tax margin
usually expressed as a percentage. It is the operating profit remaining after subtracting the cost of goods sold from the revenues (sales), divided by those revenues
