Equations/Ratios/Definitions

Question 1

What is formula for computing the combined equity in an account that has long and short positions?

Answer 1

(Long Market Value - Debit Balance) + (Credit Balance - Short Market Value)

Question 2

What is the formula for determining equity in a short margin account?

Answer 2

Credit Balance (CR) - Short Market Value (SMV) = Equity (EQ)

Question 3

What is the credit balance in a short margin account?

Answer 3

• Represents all of the cash that is being deposited based on the short sale.
• Two components that make up the credit balance are the total proceeds generated by the short sale plus the original margin requirement on the value of the short sale.

Question 4

What is the short market value in a short margin account?

Answer 4

It is the current market value of the securities that have been sold short.

Question 5

What is the formula for determining equity in a long margin account?

Answer 5

Long Market Value (LMV)- Debit Balance (DB) = Equity (EQ)

Question 6

What is the debit balance in a long margin account?

Answer 6

The amount the customer borrowed from and currently owes the brokerage firm.

Question 7

What is the formula for determining how many index options contracts a person needs to buy to hedge a portfolio against downside risk?

Answer 7

(Portfolio Value / (Index value x $100)) x Portfolio Beta

Question 8

What is the VIX?

Answer 8

The CBOE’s Volatility Market Index - Broad-based index option that is calculated using bid and ask quotes of the S&P Index options. The VIX weights both the nearby and second nearby options that have at least 8 days to expiration to produce a 30-day measure of the volatility of the S&P Index.

• European style exercise
• 2.5 point strike price intervals

Question 9

What is the formula for determining the Public Offering Price (POP)?

Answer 9

NAV / (100% - Sales Charge %)

Question 10

What is the formula for EPS?

Answer 10

(Net Income - Preferred Dividends) / Number of shares of common stock outstanding)

Question 11

What is the formula for finding the sales charge ($)?

Answer 11

Offering price - NAV

Question 12

What is the formula for finding the sales charge (%)?

Answer 12

Sales charge / Offering price.

Question 13

What is the formula for finding the after-tax return for a corporation on a dividend?

Answer 13

For most dividends (when company does not own more than 20%):
Dividend yield x (100% - (30% x Tax Bracket %)

Question 14

What is the formula for determining how much stock is outstanding?

Answer 14

Issued stock - Treasury Stock = Outstanding Stock

Question 15

What is the formula for finding a stock’s current yield (dividend yield)?

Answer 15

Annualized dividend per share / current market price

Question 16

What are current assets?

Answer 16

They represent cash and other items that may be converted into cash within a short period (usually one year).

Question 17

What is the formula for operating profit margin?

Answer 17

Net Operating Income / Sales.

Question 18

What is the formula for the bond coverage ratio?

Answer 18

EBIT / Interest Expense

Question 19

What is the net working capital ratio formula?

Answer 19

Total Current Assets (CA) - Total Current Liabilities (CL)

Question 20

How is the current ratio calculated?

Answer 20

Total Current Assets / Total Current Liabilities

Question 21

How is the quick asset (Acid Test) ratio calculated?

Answer 21

(Total Current Assets - Inventory) / Total Current Liabilities

Question 22

How is the cash flow ratio calculated?

Answer 22

Net Income (or Loss) + Annual Depreciation

Question 23

How is a company’s long-term capital calculated?

Answer 23

Long-term liabilities plus stockholder’s equity

Question 24

What is the formula for the bond ratio?

Answer 24

Par Value of Bonds / Total Long-Term Capital

Question 25

What is the formula for the common stock ratio?

Answer 25

(Common Stock at Par + Capital Surplus + Retained Earnings) / Total Long-Term Capital

Question 26

What is the formula for the debt-to-equity ratio?

Answer 26

Debt / Shareholder equity (part value of common stock + Capital surplus + retained earnings)

Question 27

What is the formula for book value per common share?

Answer 27

(Total Assets - (Intangibles + Total Liabilities + Preferred Stock)) / Number of Outstanding Common Shares

Question 28

What is the return on common equity formula?

Answer 28

(Net Income - Preferred Dividends) / (Common stock at par + capital surplus + retained earnings)

Question 29

What is the formula for the dividend payout ratio?

Answer 29

Annual Dividend Paid on Common Stock / Earnings Per Share