Advanced Investments

Question 1

Return on Equity ratio

Answer 1

Net income / Total Equity

Question 2

Return on Assets ratio

Answer 2

Net income / Assets

Question 3

Equity Multiplier ratio

Answer 3

Assets / Total Equity or (1 + debt/equity ratio)

Question 4

DuPont Identity components

Answer 4

Profit margin x total asset turnover x equity multiplier

Question 5

Profit margin ratio

Answer 5

Net income / Sales

Question 6

Total Asset turnover ratio

Answer 6

Sales / Assets

Question 7

Difference between ROA and ROE?

Answer 7

ROA includes leverage and ROE does not.

Question 8

Point of DuPont identity?

Answer 8

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)

Question 9

debt-equity ratio

Answer 9

Liabilities / equity

Question 10

Equivalent taxable yield equation

Answer 10

r(1 - t) = rm

Question 11

ask price (t-bill)

Answer 11

price you would have to pay to buy a T-bill from a securities dealer

Question 12

bid price (t-bill)

Answer 12

slightly lower price you would receive if you wanted to sell a bill to a dealer

Question 13

T-bills

Answer 13

sell in minimum denominations of $100. Exempt from all state and local taxes. durations of 4, 13, 26, or 52 weeks.

Question 14

treasury notes

Answer 14

maturities ranging up to 10 years.

Question 15

treasury bonds

Answer 15

maturities from 10-30 years.

Question 16

Preferred stock

Answer 16

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.

Question 17

Expected Holding Period Return (HPR or Er)

Answer 17

Expected dividend + price appreciation divided by current price. {E(Dt) + [E(Pt) - P0]} / P0

Question 18

CAPM

Answer 18

rf + B[E(rm) - rf] (risk free rate + beta times market rate - risk free rate)

Question 19

Constant Growth Dividend Discount Model

Answer 19

V0 = D1 / (k - g)

Question 20

Stock Purchase Profits

Answer 20

Profit = (ending price + dividend) - initial price

Question 21

Price-weighted index

Answer 21

Holds one share of each stock and is based on their average price. (eg. 90 + 50 + 100 = 80)

Question 22

Value-weighted index

Answer 22

Based on market value of equity. (A = 500 mil equity, B = 100 mil equity, so A has 5x weight)

Question 23

EBITDA Formula

Answer 23

Net Income + Interest + Taxes + Depreciation + Amortization

Question 24

Margin Rate of Return

Answer 24

(#shares * P) - (loan + interest) - (initial equity) / initial equity

Question 25

ask price (stock)

Answer 25

Lowest price somebody is willing to sell a share.

Question 26

bid price (stock)

Answer 26

Highest price somebody is willing to buy a share.

Question 27

Supply Side Economics

Answer 27

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.

Question 28

Net Asset Value

Answer 28

(Market Value of Assets - Liabilities) / Shares outstanding

Question 29

Holding Period Return

Answer 29

(Current Price - initial price) / initial price

Question 30

Net Working Capital

Answer 30

Current Assets - Current Liabilities

Question 31

FCFF formula

Answer 31

``` EBIT x (1 - t) + deprec - capex - ∆NWC or EBIT - taxes + deprec - capex - ∆NWC ```

Question 32

FCFE formula

Answer 32

FCFF - Interest Expense x (1 - t) + increases in net debt

Question 33

∆NWC

Answer 33

(CA2018 - CL2018) - (CA2017 - CL2017) | Subtract current year from prior year

Question 34

Sharpe Ratio Definition

Answer 34

Divides average portfolio excess return over the sample period by the standard deviation of returns over that period.

Question 35

Sharpe Ratio Formula

Answer 35

(Rp - Rf) / SD of portfolio

Question 36

Treynor Measure Definition

Answer 36

Is a ratio of excess return to beta, like the Sharpe ratio, but it uses systematic risk (beta) instead of total risk (standard deviation).

Question 37

Treynor Measure Formula

Answer 37

(Rp - Rf) / Beta | Beta is weighted average Beta for portfolio

Question 38

Jensen's Measure Formula

Answer 38

Alpha = Rp - [Rrf + (Rmktp - Rrf)(Beta)]

Question 39

IRR definition

Answer 39

Dollar weighted return, calculated when NPV = 0

Question 40

Jensen's Alpha Definition

Answer 40

The average return on the portfolio over and above that predicted by the CAPM, given the portfolio's beta and the average market return.