Exam 3 Flashcards by Brody Unknown

Income statement steps

Net Sales
COGS
Gross Profit
Ops. Exp.
EBIT
Interest Exp.
EBT
Income Tax
Net Income

How well did you know this?

Not at all

Perfectly

Alternate name for EBIT

Operating profit/earning before income tax

How well did you know this?

Not at all

Perfectly

Alternate name for net income

profit / earnings

How well did you know this?

Not at all

Perfectly

Dividend payout ratio formula + interpret

dividends / net income
implies how much money is retained
high dividends low reinvest - old/large
low dividends high reinvest - new/small

How well did you know this?

Not at all

Perfectly

Alt names for reinvested profits

retained earnings

How well did you know this?

Not at all

Perfectly

Alt names for fundamental value V

intrinsic value / theoretical

How well did you know this?

Not at all

Perfectly

what to compare V to

Relative Value

Absolute Value

How well did you know this?

Not at all

Perfectly

Relative Value

fundamental value is determined by comparing it to similar assets (real estate)

How well did you know this?

Not at all

Perfectly

Absolute Value

fundamental value is based on its own characteristics

How well did you know this?

Not at all

Perfectly

Undervalued

market price is less than its fundamental value, buy, bullish

How well did you know this?

Not at all

Perfectly

Overvalued

market price is higher than its fundamental value, sell, bearish

How well did you know this?

Not at all

Perfectly

Fairly Valued

market price is equal to fundamental value

How well did you know this?

Not at all

Perfectly

Bullish

prices are undervalued and will return more than expected, prices going up

How well did you know this?

Not at all

Perfectly

Bearish

prices are overvalued and will return less than expected, prices going down

How well did you know this?

Not at all

Perfectly

nominal risk free rate

T-bill rate, treasury rate, with inflation, on a risk free asset

How well did you know this?

Not at all

Perfectly

real risk free rate

interest rate on a risk free asset without inflation, not used on treasuries

How well did you know this?

Not at all

Perfectly

Preferred stocks 2 preferences

Liquidation

Dividend

How well did you know this?

Not at all

Perfectly

Liquidation preference

payment preference over common shareholders from sell off of easily sellable assets if business goes under

How well did you know this?

Not at all

Perfectly

Dividend preference

preferred stockholders get dividends before common stockholders

How well did you know this?

Not at all

Perfectly

Order of payment in corporate liquidation

Secured lenders
unsecured lenders (bonds)
pref. stockholders
common stockholders

How well did you know this?

Not at all

Perfectly

Dividend

distribution of earnings to shareholders

How well did you know this?

Not at all

Perfectly

convertible preferred

may be exchanged for common at option of the holder

How well did you know this?

Not at all

Perfectly

stated dividend

a stated dollar amount

percentage based on the stocks par value

How well did you know this?

Not at all

Perfectly

is pref stock riskier to issue than bonds

no, because dividends are not legally obligated like they are on bonds, payments can be skipped
no, bonds mature and have to be paid back

How well did you know this?

Not at all

Perfectly

is pref stock risker to invest in than bonds

yes, because it has a lower priority on liquidation, bonds are unsecured credit

why a corp intends to pay divs

cant pay common stocks until preferred are may allow pref holders voting rights if they dont get them gives a bad reputation to the market if they dont

does preferred stocks dividend ever increase?

does common stock dividend ever change?

yes, if the company becomes more profitable and pays out more

is a corp required to pay dividends

who decides if stocks are paid

board of directors

which shares dont get dividends and why

treasury, they are held by the company and not investors

3 types of dividends

Cash Stock Property

Dividend Yield Formula

annual dividend $ / current market price | measures income only

Transfer Agent

maintains who receives dividends

Corporate Charter / Articles of Incorp.

Registered with the secretary of state, establish the existence of a corp in the US outlining objectives

Authorized Stock

max shares a corp is allowed to issue, stated in articles of incorp

Issued Stock

The amount of shares registered and either held in treasury or sold

Outstanding Stock

only shares that have been sold

Treasury Stock

Stock not sold or sold stock bought back

Pre-emptive Right

Clause to buy new shares first to maintain percentage owned

Corporation

a legally incorporated business entity, owners are shareholders

Incorporation

the process of becoming a business entity

Company

a business whose owners are members of the business, not legal entity

formula for number of shares outstanding

issued shares - treasury shares

how are books affected by declaration date

the day the board of directors decides to pay the dividend, reduce retained earnings increase dividends payable

how are books affected by the record date

the day you need to own the stock by to get the dividend, is not recorded at all

market cap formula

current market price * shares outstanding

under performance

investment did not do as well as what it is being compared to

out performance

investment did better than what it is being compared to

benchmark

the standard to judge performance

index

a measure designed to measure a particular market or sub set of a market

S&P 500

measures performance of 500 large us stocks

Russell 2000

measures performance of 2000 small US stocks

MSCI EAFE (ee-fuh)

measures performance of stocks in europe, asia, far east

BRICS

``` 5 emerging markets Brazil Russia India China South Africa ```

Index Fund

Invests in the securities of a specific index

Market Risk Premium formula

expected return - nominal risk free rate

CAPM

Capital Asset Pricing Model

required rate of return formula (rs)

nominal risk free rate + (beta * market risk premium)

what are equities

common stocks

what is the equities market

common stock market only

equilibrium

when expected return = required return, they become interchangable

does market risk premium change over time

yes

what does market risk premium measure

degree of risk aversion in the market

what do investors compare intrinsic value to

market value

how to determine theoretical value

add value of future cashflows

dividend discount model | present value of all future dividends

P0 = D1/rs-g P0 = V at time 0 D1 = dividend at end of year 1 (dollar amount + growth rate ^ # terms) rs = required rate of return on the stock (expected return) g = annual growth rate

how to modify dividend discount model for x year

make D one bigger than P and terms = # of P

how is market risk affected when there is higher percived risk

goes up

how is market risk affected when there is lower percived risk

goes down

current yield stock formula

interest $ / current price

current dividend bond formula

coupon rate / current market value