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65 Final Prep > Computations & Examples > Flashcards

Computations & Examples Flashcards

1
Q

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?

A

($45 - $40) / $40 = 0.125

(POP - NAV) / NAV = 12.5%

12.5% Premium Premium because the shares are selling above the NAV

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2
Q

Alpha Formula?

A

AR - RF - (MR - RF)

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3
Q

Gross profit/margin forumla?

A

Sales or Revenue - COGS

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4
Q

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…

A
  1. Compute parity price

(Par/Conversion Price)

$1,000/$40 = 25 shares

  1. 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

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5
Q

Real Rate of Return formula?

A

Nominal ROR - Inflation rate

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6
Q

Risk Adjusted Return formula?

A

Growth Rate / Beta

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7
Q

Internal Rate of Return formula?

A
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8
Q

Internal Rate of Return…

A
  • the discount rate that makes the NPV of an investment equal to zero
  • is determined iteratively
  • takes into considertion the time value of money
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9
Q

After Tax Return formula?

A

Total Return - (100% - Marginal Tax Bracket)

Appreciation + Income = Total Return

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10
Q

Net Present Value (NPV)

A

PV - Cost Basis

(Expressed as a dollar amount)

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11
Q

Dividend Discount Model

A

Expected next year dividend rate

____________________________________________

(Required rate of return - Dividend growth rate)

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12
Q

The dividend discount model is

A

A way of finding the theoretical price of common stock

It takes anticipated future dividends & discounts them to PV

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13
Q

CAPM formula?

A

ER = RF + B (ER - RF)

ER = Expected return of investment

RF = Risk Free Rate

B = Beta of Investment

ER - RF = Market Risk Premium

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14
Q

Dollar weighted average return

A
  • 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
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15
Q

Time weighted average return

A
  • 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
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16
Q

Equity Formula?

A

Long Market Value - Debt Balance

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17
Q

Sharpe Ratio formula?

A

Portfolio Return - RFR

_________________________

Standard deviation of the portfolio

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18
Q

The higher the Sharpe ratio…

A

the better the risk-adjusted performance of the portfolio

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19
Q

Present Value (PV)

A

Value today of the future cash flows of an investment discounted at a specific IR to determine present worth of future cash flows

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20
Q

The Sharpe ratio is used to…

A

help investors understand the return of an investment compared to it’s risk

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21
Q

Share price formula?

A

Value of next dividend payment

______________________________

Rate of return - growth rate

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22
Q

In order to compute the real rate of return on a specific stock, what information is required?

A
  • Capital gain or loss
  • Any dividends paid
  • Change to the CPI
23
Q

Real rate of return is another way of asking for…

A

Inflation-adjusted return

(Dividends + capital gain or loss - inflation rate)

24
Q

Present Value formula?

A

PV = FV / (1 + r) ^n

25
Q

Time Value of Money formula?

A

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

26
Q

Future Value formula?

A

FV = PV x ( 1 + r) ^ n

r = rate of return

n = # of years invested

27
Q

Future Value indicates…

A

what an amount invested today at a goven interest rate will be worth at some point in the future

28
Q

Compound Value of an Amount formula?

A

Compound Value = Principal ( 1 + IR) ^ # of years

29
Q

Customer liabilities

A
  • mortgages
  • consumer loans (credit cards)
30
Q

Quick ratio (acid test) formula?

A

Current Assets less Inventories

____________________________

Current Liabilities

31
Q

Customer Assets

A
  • property
  • investments
  • jewlery
32
Q

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?

A
  1. $0.15 x 4 = $0.60 (annualized dividend)
  2. $0.60/$2.40 = 25%
33
Q

IRR is most often used with…

A

growth s

34
Q

Use of cash flow statement?

A

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])
35
Q

Specific Identification

A

A method of determining the capital gain or loss on the sale of secutities, where the investor can specify the securities that were sold.

36
Q

If an investor uses specific identification for securities with the highest cost basis to be sold, then the resultant capital gain will be..

A

Smaller

37
Q

If Specific Identification is not used to determine capital gain/loss, then…

A

LIFO is used

38
Q

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?

A

225/7.5 = $30/share (market price)

15/7.5 = $2/EPS

30:2 // 15:1

PE Ratio: 15:1

39
Q

The Debt/Equity ratio is…

A
  • 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)
40
Q

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?

A

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

41
Q

Dollar cost averaging

A

a funding method that consists of investing the same amount of money at fixed intervals into the same investment

42
Q

Computing the Sharpe Ratio requires…

A
  • 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

43
Q

NAV Per Share (NAVPS)

A

NAV

____________________

Shares Outstanding

44
Q

Discounted Cash Flow

A

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

45
Q

DCF formula?

A

DCF = CF1/(1+r)^n + CF2/(1+r)^n…

46
Q

Expected Return (CAPM) formula?

A

ER = RF + B (MR - RF)

47
Q

What dos Yield To Call (YTC) computation involve knowing?

A
  • Amount of interest payments to be received
  • Length of time to call
  • Call Price
  • Current Price
48
Q

YTC formula?

A

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

49
Q

The premature distribution penalty does not apply if…

A

the distribution is made after the death of the account owner, regardless of the age of the owner or the beneficiary

50
Q

What ratios measure the liquidity of a corporation?

A
  • acid test ratio
  • current ratio
  • quick ratio
51
Q

Capital needs analysis is used to…

A

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
52
Q

Current Ratio formula

A

Current Assets

____________________

Current Liabilties

53
Q

Corporations Current Assets

A
  • Cash
  • Accounts receivable
  • Negotiable securities
  • Inventories
54
Q

Corporations Current Liabilities

A
  • Accounts payable
  • Wages
  • This years interest

65 Final Prep (8 decks)

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