Asset Classes 4 - Equities(b) Flashcards
What is the formula of the dividend valuation (Gordon growth) model?
Share Price = Dividend / ( Return required − Dividend growth )
What is the formual for dividend yield?
Gross Dividend / Current Share Price
What is the formula for EPS?
Profit attributable to ordinary shareholders / Current Share Price
(Profit = net profit after taxes and preferred dividend / no of shares in issue)
What is the formula for Earnings Yield?
EPS / Price per share
What is the formula for PE ratio and what does it tell you?
PE = Price per share / EPS
- A high P/E ratio may indicate a relatively low perception of risk, or an expectation of good profits growth. Alternatively, it could mean that the share price is high relative to the company’s earnings and the shares are possibly overvalued.
What is the formula for Price Earnings Growth (PEG) and how is it used?
PEG ratio = PE ratio / EPG growth rate
Theoretically, a PEG ratio of one represents a perfect correlation between the market value of a company and its projected earnings growth. A PEG ratio that is higher than one can suggest that a stock is overvalued; while a PEG ratio below one indicates a stock is undervalued, which is more favourable.
What is the formula for Dividend Cover?
Dividend Cover = DPS / EPS
What is the formula for Price-to-Cash Flow (P/CF) Ratio and how it is interpreted?
P/CF Ratio = Price per share / Operating Cash Flow per share
This measure assesses the market’s expectations or prospects about a company’s financial health.
What is the formula for the Price to Book Ratio and its uses?
P/B ratio = price per share / book value per share
Used for banking sector
What is the formula for the Enterprise Value and its uses?
EV = Market cap + Debt − Cash − Cash equivalents
It is considered a theoretical measure for the cost of takeover.
What is the formula for the Return on Equity and its uses?
ROE = Profits after tax and dividends / capital and reserves (shareholders funds)
ROE measures the percentage return that the company is achieving on the amount of funds provided by shareholders,
What is the formula for the Return on Capital Employed and why is it better than ROE?
ROCE (%) = Profit before interest and tax / Capital Employed (= total assets + current liabilities)
- ROCE is a better comparison between companies than ROE, since ROE is heavily affected by differences in the capital structure of companies
What are the 2 gearing formulas?
1) Gearing (%) = Long -term liabilities / Capital Employed
2) Gearing (%) = Earnings before interest and tax / Interest payable
What is the formula for the Working Capital (CURRENT) Ratio and its uses?
Current ratio ( x ) = Current assets / Current liabilities
- The purpose of this is to determine if the current assets recoverable within one year are sufficient to cover the liabilities that fall due within that year. A NUMBER BETWEEN 1.5-2 IS ACCEPTABLE
What is the formula for the Quick (ACID TEST) Ratio and its uses?