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.
Expected Holding Period Return (HPR or Er)
Expected dividend + price appreciation divided by current price. {E(Dt) + [E(Pt) - P0]} / P0
CAPM
rf + B[E(rm) - rf] (risk free rate + beta times market rate - risk free rate)
Constant Growth Dividend Discount Model
V0 = D1 / (k - g)
Stock Purchase Profits
Profit = (ending price + dividend) - initial price
Price-weighted index
Holds one share of each stock and is based on their average price. (eg. 90 + 50 + 100 = 80)
Value-weighted index
Based on market value of equity. (A = 500 mil equity, B = 100 mil equity, so A has 5x weight)
EBITDA Formula
Net Income + Interest + Taxes + Depreciation + Amortization
Margin Rate of Return
(#shares * P) - (loan + interest) - (initial equity) / initial equity
ask price (stock)
Lowest price somebody is willing to sell a share.
bid price (stock)
Highest price somebody is willing to buy a share.
Supply Side Economics
Goal is to create an environment in which workers and owners of capital have the maximum incentive and means to produce and develop goods. Supply-siders focus on how tax policy can improve incentives to work and invest.
Net Asset Value
(Market Value of Assets - Liabilities) / Shares outstanding
Holding Period Return
(Current Price - initial price) / initial price
Net Working Capital
Current Assets - Current Liabilities
FCFF formula
EBIT x (1 - t) + deprec - capex - ∆NWC or EBIT - taxes + deprec - capex - ∆NWC
FCFE formula
FCFF - Interest Expense x (1 - t) + increases in net debt
∆NWC
(CA2018 - CL2018) - (CA2017 - CL2017)
Subtract current year from prior year
Sharpe Ratio Definition
Divides average portfolio excess return over the sample period by the standard deviation of returns over that period.
Sharpe Ratio Formula
(Rp - Rf) / SD of portfolio
Treynor Measure Definition
Is a ratio of excess return to beta, like the Sharpe ratio, but it uses systematic risk (beta) instead of total risk (standard deviation).
Treynor Measure Formula
(Rp - Rf) / Beta
Beta is weighted average Beta for portfolio
Jensen’s Measure Formula
Alpha = Rp - [Rrf + (Rmktp - Rrf)(Beta)]
IRR definition
Dollar weighted return, calculated when NPV = 0
Jensen’s Alpha Definition
The average return on the portfolio over and above that predicted by the CAPM, given the portfolio’s beta and the average market return.