Exam 3 Flashcards
Income statement steps
Net Sales COGS Gross Profit Ops. Exp. EBIT Interest Exp. EBT Income Tax Net Income
Alternate name for EBIT
Operating profit/earning before income tax
Alternate name for net income
profit / earnings
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
Alt names for reinvested profits
retained earnings
Alt names for fundamental value V
intrinsic value / theoretical
what to compare V to
Relative Value
Absolute Value
Relative Value
fundamental value is determined by comparing it to similar assets (real estate)
Absolute Value
fundamental value is based on its own characteristics
Undervalued
market price is less than its fundamental value, buy, bullish
Overvalued
market price is higher than its fundamental value, sell, bearish
Fairly Valued
market price is equal to fundamental value
Bullish
prices are undervalued and will return more than expected, prices going up
Bearish
prices are overvalued and will return less than expected, prices going down
nominal risk free rate
T-bill rate, treasury rate, with inflation, on a risk free asset
real risk free rate
interest rate on a risk free asset without inflation, not used on treasuries
Preferred stocks 2 preferences
Liquidation
Dividend
Liquidation preference
payment preference over common shareholders from sell off of easily sellable assets if business goes under
Dividend preference
preferred stockholders get dividends before common stockholders
Order of payment in corporate liquidation
Secured lenders
unsecured lenders (bonds)
pref. stockholders
common stockholders
Dividend
distribution of earnings to shareholders
convertible preferred
may be exchanged for common at option of the holder
stated dividend
a stated dollar amount
percentage based on the stocks par value
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
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?
no
does common stock dividend ever change?
yes, if the company becomes more profitable and pays out more
is a corp required to pay dividends
no
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
