Advanced Investments Flashcards
Return on Equity ratio
Net income / Total Equity
Return on Assets ratio
Net income / Assets
Equity Multiplier ratio
Assets / Total Equity or (1 + debt/equity ratio)
DuPont Identity components
Profit margin x total asset turnover x equity multiplier
Profit margin ratio
Net income / Sales
Total Asset turnover ratio
Sales / Assets
Difference between ROA and ROE?
ROA includes leverage and ROE does not.
Point of DuPont identity?
It decomposes ROE into its component parts and tells us that ROE is affected by three things: 1) operating efficiency (as measured by profit margin) 2. Asset use efficiency (as measured by total asset turnover) 3. Financial leverage (as measured by the equity multiplier)
debt-equity ratio
Liabilities / equity
Equivalent taxable yield equation
r(1 - t) = rm
ask price (t-bill)
price you would have to pay to buy a T-bill from a securities dealer
bid price (t-bill)
slightly lower price you would receive if you wanted to sell a bill to a dealer
T-bills
sell in minimum denominations of $100. Exempt from all state and local taxes. durations of 4, 13, 26, or 52 weeks.
treasury notes
maturities ranging up to 10 years.
treasury bonds
maturities from 10-30 years.
Preferred stock
Fixed dividend per year; no voting power; cumulative dividends; corporations can exclude 70% of dividends received from domestic corporations in computation of taxable income; often sells at lower yields than corp bonds.
