Computations & Examples Flashcards
The shares of the LMN closed-end management investment company are selling at $45, while LMN’s NAV is $40. How would you determine how the shares are currently selling?
($45 - $40) / $40 = 0.125
(POP - NAV) / NAV = 12.5%
12.5% Premium Premium because the shares are selling above the NAV
Alpha Formula?
AR - RF - (MR - RF)
Gross profit/margin forumla?
Sales or Revenue - COGS
DERP Corp’s 5% convertible debentures maturing in 2030 are currently selling for 120. The conversion price is $40. One would expect DERP common stock to be selling…
- Compute parity price
(Par/Conversion Price)
$1,000/$40 = 25 shares
- Current price / x Shares
$1200/25 = $48
120 is a premium, so the stock would have a current value of a bit less than $48/share
Real Rate of Return formula?
Nominal ROR - Inflation rate
Risk Adjusted Return formula?
Growth Rate / Beta
Internal Rate of Return formula?
Internal Rate of Return…
- the discount rate that makes the NPV of an investment equal to zero
- is determined iteratively
- takes into considertion the time value of money
After Tax Return formula?
Total Return - (100% - Marginal Tax Bracket)
Appreciation + Income = Total Return
Net Present Value (NPV)
PV - Cost Basis
(Expressed as a dollar amount)
Dividend Discount Model
Expected next year dividend rate
____________________________________________
(Required rate of return - Dividend growth rate)
The dividend discount model is
A way of finding the theoretical price of common stock
It takes anticipated future dividends & discounts them to PV
CAPM formula?
ER = RF + B (ER - RF)
ER = Expected return of investment
RF = Risk Free Rate
B = Beta of Investment
ER - RF = Market Risk Premium
Dollar weighted average return
- Most often used by MF investors
- Rate of return achieved taking into account the timing of the investors cash inflows into the fund & cash withdrawals from the fund
Time weighted average return
- The return producted over time by a fund independent of contributions or withdrawals
- Measures a fund’s compounded rate of growth over a specified time period
Equity Formula?
Long Market Value - Debt Balance
Sharpe Ratio formula?
Portfolio Return - RFR
_________________________
Standard deviation of the portfolio
The higher the Sharpe ratio…
the better the risk-adjusted performance of the portfolio
Present Value (PV)
Value today of the future cash flows of an investment discounted at a specific IR to determine present worth of future cash flows
The Sharpe ratio is used to…
help investors understand the return of an investment compared to it’s risk
Share price formula?
Value of next dividend payment
______________________________
Rate of return - growth rate
In order to compute the real rate of return on a specific stock, what information is required?
- Capital gain or loss
- Any dividends paid
- Change to the CPI
Real rate of return is another way of asking for…
Inflation-adjusted return
(Dividends + capital gain or loss - inflation rate)
Present Value formula?
PV = FV / (1 + r) ^n
Time Value of Money formula?
FV = PV x [1 + ( i / n)] ^ (n x t)
FV = Future Value
PV = Present Value
i = Interest Rate
n = # of compounding periods per year
t = # of years
Future Value formula?
FV = PV x ( 1 + r) ^ n
r = rate of return
n = # of years invested
Future Value indicates…
what an amount invested today at a goven interest rate will be worth at some point in the future
Compound Value of an Amount formula?
Compound Value = Principal ( 1 + IR) ^ # of years
Customer liabilities
- mortgages
- consumer loans (credit cards)
Quick ratio (acid test) formula?
Current Assets less Inventories
____________________________
Current Liabilities
Customer Assets
- property
- investments
- jewlery
Company X pays a quarterly dividend of $0.15 and has EPS of $2.40. Assuming the payout rate is continued, what is the dividend payout ratio?
- $0.15 x 4 = $0.60 (annualized dividend)
- $0.60/$2.40 = 25%
IRR is most often used with…
growth s
Use of cash flow statement?
Report a business sources use of cash and beginning/ending values for cash & cash equivalents each year
3 Components:
- Operating Activities (Transactions)
- Investing Activities (Purchase/Sale of Securities, Land, Buildings, Equiptment & other Assets)
- Financing Activities (Flow of cash to or from business owners [Equity Financing] & creditors [Debt Financing])
Specific Identification
A method of determining the capital gain or loss on the sale of secutities, where the investor can specify the securities that were sold.
If an investor uses specific identification for securities with the highest cost basis to be sold, then the resultant capital gain will be..
Smaller
If Specific Identification is not used to determine capital gain/loss, then…
LIFO is used
X Corp has just distributed a 7.5:1 split of common stock.
EPS: $15
Market Price: $225/share
What is the PE after the stock split?
225/7.5 = $30/share (market price)
15/7.5 = $2/EPS
30:2 // 15:1
PE Ratio: 15:1
The Debt/Equity ratio is…
- a measurement of the leverage employed in a corporation’s capital structure
- it compares the total long-term debt to the total capitalization (long-term debt plus equity capital)
A customer has purchased 1,000 shares of ABC stock at $30/share, paying commission of $1/share.
ABC declares a 5% stock dividend.
What is the status of the investment?
1000 x 1.05 = $1,050 shares after the dividend
Original Cost basis = $30 + $1 = $31
After the dividend is paid, the cost basis is adjusted:
$31/1.05 = $29.52
Dollar cost averaging
a funding method that consists of investing the same amount of money at fixed intervals into the same investment
Computing the Sharpe Ratio requires…
- standard deviation of the security (SD)
- risk-free return available in the market (RF)
- actual rate of return of the security (AR)
AR - RF
__________
SD
NAV Per Share (NAVPS)
NAV
____________________
Shares Outstanding
Discounted Cash Flow
a method of assessing the value of a fixed-income security by looking at the future expected free cash flow & discounting it to arrive at a present value
DCF formula?
DCF = CF1/(1+r)^n + CF2/(1+r)^n…
Expected Return (CAPM) formula?
ER = RF + B (MR - RF)
What dos Yield To Call (YTC) computation involve knowing?
- Amount of interest payments to be received
- Length of time to call
- Call Price
- Current Price
YTC formula?
P = (C / 2) x {(1 - (1 + YTC / 2) ^ -2t) / (YTC / 2)} + (CP / (1 + YTC / 2) ^ 2t)
P = the current market price
C = the annual coupon payment
CP = the call price
t = the number of years remaining until the call date
YTC = the yield to call
The premature distribution penalty does not apply if…
the distribution is made after the death of the account owner, regardless of the age of the owner or the beneficiary
What ratios measure the liquidity of a corporation?
- acid test ratio
- current ratio
- quick ratio
Capital needs analysis is used to…
determine the proper amount of life insurance that would provide for the family’s needs in the event of premature death of the primary breadwinner
must know:
- client’s projected earnings
- projected inflation rate
- client’s age
Current Ratio formula
Current Assets
____________________
Current Liabilties
Corporations Current Assets
- Cash
- Accounts receivable
- Negotiable securities
- Inventories
Corporations Current Liabilities
- Accounts payable
- Wages
- This years interest
