Danko Additional - March Flashcards
Use of Payment Begin or End
Begin Mode:
College Tuition
Retirement Benefits
Family Needs
End Mode:
401K Deferral
Profit Sharing Contributions
Bond Interest Paid
Mortgage Payments
Three variations of questions involving unequal cash flows
- Calculate PV = always enter zero as first input + I/YR hint: OPP
- Calculate IRR (dollars weighted return) = initial investment is a negative input hint: I -initial
- Calculate NPV = always enter the initial investment as a negative input + I/YR hint: N negative
NPV (net present value)
The difference between the PV, and the amount of initial outlet is the net present value (NPV)
What happens when NPV is zero?
The IRR is also zero and matches the npv
Which investment vehicles should the emergency fund be invested in?
checking accounts
Government, money market accounts
CD if close to maturity less than 90 days
Saving accounts
Laddered CDs less than six months maturity
Financial Statements - Yearly Debt
Found on Cashflow statement. Does not include taxes and insurance.
Chartered Bank Regulators
Federally/Nationally Chartered - Comptroller of the currency, Federal Reserve, & FDIC
State Chartered - the governing state, Federal Reserve, FDIC
After Tax Mortgage Payment for the Year
- End mode +12 per yr
- Solve for Payment
- multiply payment by year worth of months
- round down the payment amount of the year
- multiply rounded payment by tax bracket
- subtract the interest from the full amount of payments made for the year.
RESULT IS AFTER TAX PAYMENT FOR THE YEAR
Holding Period Return (Question Format) + calculation
What is the rate of return?
What is his/her HPR?
Sold price + income - purpose price/ purchase price
After Tax HPR Calc Steps
- Find out net gain
- Is it long-term or short term
- Calculate 1- (the tax withholdings)
- Multiply the net gains by the results of #3
- The after tax gain!
YTM (Yield to Maturity) Calculation
IT’S A TVM QUESTION!!
END MODE + 2 P/YR
N/I/PV/PMT (50% of annual coupon) / FV ($1K)
IRR - Internal Rate of Return
NOTE: P/YR function affects the IRR. set it to 1 P/YR!
Always net the annual activity
Use cashflow key, then IRR key
YTC (Yield to Call) Calculation
Same as YTM except the FV is the ‘call price’ and maturity date is replaced with ‘call date’.
Current Yield Calculation
Annual Interest $/ Current Market Price
TEY (Tax EQUIVALENT Yield) [Question Format & Calculations]
the return that a taxable bond needs to possess for its yield to equal the yield on a comparable tax-exempt bond, such as a municipal bond.
If question has muni and tax bracket info use TEY
Muni (tax exempt Yield/1- (tax bracket)
Tax EXEMPT Yield
Converts yield to tax exempt!
If question has taxable corporate bond yield AND muni yield + tax bracket use EXEMPT yield calculation.
TEY x (1-tax rate)
Geometric Return Calculation
add each return by 1 (example 1+8% =1.08).
2. add all values together. sum = PV
3. TVM = N, I=?, PV=sum, FV = 1
4. solve for I
Duration (reallocation)- Question/Calculation
Find out current portfolio duration:
1. Get the average of the current portfolio duration by adding the duration of each bond then divideingto.This will become the target duration.
9 + 5.6 = 14.6/2 = 7.3 duration
THEN:
Take the corresponding potion percentage. Example:
40% X: 60% Y = (40% of 9) + (60% of 5.6) = 3.6 + 3.36 = 6.96
reallocation of proportion of bonds works with 40%/60% blend
Dividend Growth Model - Question/Calculation
*you can use to determine if a stock is over or undervalued
IS THIS STOCK A BARGAIN OR OVERPRICED??
A. What is the estimated price of a stock paying XX in dividends with a growth rate of XX and a required rate of return of XX?
B. If stock is selling for XX, would you suggest client purchase?
D(1+g)/r-g
Expected Return
*you can use to determine if something will make the required rate of return.
Do(1+g)/price) + g = percentage
Price/Free Cash Flow - Question/Calculation
Similar to the dividend discount model, however the dividend is replaced by the free cash flow.
FCF0(1+g)/r-g
what is the maximum price that should be paid for XXX common stock?
DDM shortcut [stock with accelerating or declining growth rates]
Shortcut #1: If 1st growth rate is LOWER than 2nd use DDM w/second return only. Then choose next LOWEST number below DDM result.
Shortcut #2: If 1st is HIGHER then 2nd use DDM w/second return only. Then choose next HIGHEST number above DDM result.
Dividend Payout Ratio
“of all the money you had to payout, how much did you actually payout?”
COMMON dividend/Earnings per share
Book Value per share
Book Value/Shares Outstanding
Will sometimes be used as an extra step to determine Dividend Payout Ratio calculation.
CML (Capital Market Line)
MACRO MACRO MACRO
Specifies the relationship between risk and return on the portfolio instead of just one investment.
Reveals:
Expected return on a fully diversified portfolio
Rf
risk free return… 100% T-bills.
SML (Security Market Line)
S = SINGLE and portfolio asset valuation. Can be used to value ANY asset.
Vertical axis = expected return. Horizontal = Beta
ri = rf +(rm - rf) B1
Stock Risk Premium
(Erm - rf) B
an excess return that investing in the stock market provides over a risk-free rate. This excess return compensates investors for taking on the relatively higher risk of equity investing.
Activity Ratio
Measures how rapidly a firm is able to convert various accounts into cash.
Technical Analysis
Charting
Support
Resistance
Sentiment Indicators
Fundamental Analysis
Consider economic factors such as rates of inflation and unemployment. GDP.
The Dow Theory
Shows direction of overall market.
Barron’s Confident Index
compares returns on higher vs lesser bonds.
Dow Jones
Price-weighted average
Most widely quoted and narrow focus
S&P 500
Broader measure of NYSE activity.
Russell 2000
Popular CAP WEIGHTED index. Covers bottom 8% of Russell 3000
Wilshire 5000
BROADEST measure of activity. Value weighted.
Value Line
EQUALLY WEIGHTED
NASDAQ
Broadest measure of OTC trading. CAP WEIGHTED
Stock Split
Makes ownership of stock more affordable.
500 shares/$90 = $750 shares/$60
stock split 3/2. what is 3/2? 1.5. 1.5 * 500 shares = 750 shares
PRICE IS RECIPRICOL!!
2/3 = .6667. $90* .6667 = 60
Reverse Split
Raises price of outstanding shares
Wash Sale
30 days before and after sale of loss you cannot repurchase stock or bond within that time frame. If you purchase within the amount of the original loss sale is added to cost basis of recent purchase.
Sharpe Ratio
Ratio of excess return of the portfolio to its Standard Deviation. Used for mutual funds with low R^2
Ex-Dividend Date timing
PED = Purchase Date > Ex-Dividend date > Date of record
Alpha Ratio (formally Jensen)
Measures the contribution of the portfolio manager.
MOST WIDLEY USED
BETA!!!!
Rp - [Rf + (Rm - Rf) B]
Treynor Ratio
Ratio of excess return of the portfolio to its BETA
*BETA is the systematic risk of the asset not the market.
FUN FACT
Alpha of an S&P 500 fund = 0
Beta of an S&P 500 fund = 1
R^2
Square is the square of correlation coefficient. Index funds R^2 is close to 100%. Sector funds will have low R^2.
R^2 is greater than 60 = diversified portfolio
R^2 is less than 60 = nondiversified portfolio
Social Security earned income reduction amounts.
Parttime: $1 from each $2 earned above $21,240.
Fulltime: $1 from each $3 earned above $56,520.
Provisional Income for the taxation of Social Security
$25K for single
$32K for married
Pure Life
Highest payout for the beneficiary for his /her lifetime. No benefits for spouse.
Also called Pension Maximization or Pension Max application
PIA
The “primary insurance amount” (PIA) is the benefit (before rounding down to next lower whole dollar) a person would receive if he/she elects to begin receiving retirement benefits at his/her normal retirement age.
Programs Covered by Social Security Act
OASDI
Medicare
Fed Unemployment
SSI (supplemental security income
Fixed Contributions (DB plans)
Money Purchase Plan
Target Benefit Plans
Employment categories NOT covered by OASDI
Federal employees that are employed before 1984
Americans working abroad.
Railroad employees
Child under 18 in unincorporated business
Ministers
Members of tribal council
some state employees and teachers
FLEXible Contributions (Defined Contribution plans)
Profit Sharing Plans
Stock Bonus Plan
Defined Contribution Plans
Vesting schedule/admin costs/ exempt from creditor/integrated with social security.
Money Purchase Pension
Target Benefit Pension
Profit Share Plan
Stok Bonus Plan
Pension Plans
Defined Benefit Pension
Cash Balance Pension
Money-Purchase Pension
Target Benefit Pension
SPOUSE DETERMINES BENEFICIARY
What type of entity cannot do an ESOP?
Sole Proprietor or Partnership
When can you pull money penalty fee.
55 - Qualified plans and 403B + separate from service
59 1/2 - IRA
Benefits of a qualified plan
Contributions to the plan are tax deductible to the business.
Contributions are not currently taxable to the participants.
Contributions made on behalf of employees can be paid with dollars that would have otherwise been spent on taxes.
Earnings on contributions grow tax deferred.
Qualified plans are protected from creditors.
Provides a valuable benefit to employees and helps to attract and retain employees.
Taxation of benefits are deferred until taken in the future.
SEPTA-N
Profit Sharing Plans (7):
401K
Stock Bonus Plan
Employee Stock Plan
Profit Sharing Plan
Thrift Plan
Age-Based PSP
New Compatibility
Highly Compensated Employee (HC)
A more than 5% owner at anytime during the plan year OR proceeding year.
Current year: Employee with compensation in excess of $150K.
Prior Year: An employee with compensation in excess of $135K.
Qualified Plans (To void 10% penalty)
MESS AT DQ
Medical Expenses, Equal periodic Payments, Separation from Service, Age, Tax levies, Death/Disability and QDRO
IRA (To avoid 10% penalty)
HIDE ME
Home purchase, Health Insurance, Death and disability, Education, Medical expenses, Equal periodic payments… AGE
Profit Sharing Plan that favors Savers and Young Persons
401K and Thrift Plans
Profit Sharing Plan that favor highly compensated young persons
Profit Sharing Plans
Profit Sharing Plan that favors Highly compensated and long length of service
Stock Bonus Plan and ESOP
Profit Sharing Plan that favors older highly compensated
Age-Based Profit Sharing Plan
Profit Sharing Plan that favors owners
New Comparability Plan
Mandatory Funding Plans
Pension Plans - Defined Benefit, Cash Balance Plan, Money Purchase Plan, Target Benefit
Less Expensive Plans
Cash Balance and Money Purchase Plan
Self-employment contribution calculation
Calculate the self-employed individual’s contribution as:
Contribution Rate / (1 + Contribution Rate) = Self-employed contribution rate
Calculate self-employment tax as:
Net Self-Employment Income
x 92.35%
= Net Earnings Subject to Self-Employment Tax
x 12.4% up to $160,200 + 2.9% on all income
= Self-Employment Tax
o Calculate the self-employed individual’s contribution:
Net Self-Employment Income
- 1/2 Self-Employment Tax
= Adjusted Net Self-Employment Earnings
x Self-employed Contribution Rate
= Self-Employed Individual’s Plan Contribution
Disclaimer Clause
Must disclaim within 9 mos of the date of death. Disclaim must be in writing.
