Computations & Examples Flashcards by Hannah Shink

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

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Alpha Formula?

AR - RF - (MR - RF)

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Gross profit/margin forumla?

Sales or Revenue - COGS

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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

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Real Rate of Return formula?

Nominal ROR - Inflation rate

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Risk Adjusted Return formula?

Growth Rate / Beta

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Internal Rate of Return formula?

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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

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After Tax Return formula?

Total Return - (100% - Marginal Tax Bracket)

Appreciation + Income = Total Return

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Net Present Value (NPV)

PV - Cost Basis

(Expressed as a dollar amount)

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Dividend Discount Model

Expected next year dividend rate

____________________________________________

(Required rate of return - Dividend growth rate)

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The dividend discount model is

A way of finding the theoretical price of common stock

It takes anticipated future dividends & discounts them to PV

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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

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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

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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

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Equity Formula?

Long Market Value - Debt Balance

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Sharpe Ratio formula?

Portfolio Return - RFR

_________________________

Standard deviation of the portfolio

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The higher the Sharpe ratio…

the better the risk-adjusted performance of the portfolio

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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

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The Sharpe ratio is used to…

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

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Share price formula?

Value of next dividend payment

______________________________

Rate of return - growth rate

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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?

1. $0.15 x 4 = $0.60 (annualized dividend) 2. $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