Formulas Flashcards
Stock Dividends-
-SD factor
-New total shares
-New price
SD factor =SD (decimal) + 1
New shares= Old shares x SD factor
New price= Old price/ SD factor
Stock split (ex A:B, like 2:1or 3:2)
-SSF stock split factor
-New # of shares
-New price per share
SSF=A/B
New shares= Old shares X SSF
New price= Old price/SSF
Settlement for common stock
T (trade) + 2 bz days
Ex: trade agreement on Monday, settlement (change of record owner, delivery of funds) Wednesday
PE ratio and EPS
Price to earnings ratio=
market price/ earnings per share
High ratio- overpriced, typical of growth company
Low ratio- underpriced, typical of value company
*Note: stock splits affect earnings per share EPS. Stock split is legal manipulation of the price.
EPS= net income/ outstanding shares
Recap:
PE= market price/EPS
EPS= market price/ PE
EPS=earnings (common)/
#common shares outstanding
or
EPS= net income- preferred div/
# shares outstanding
Preferred stock- Par? Payout?
Current yield vs.
Dividend rate
CY= annual dividends/market price
(Sloppy way to determine investor’s rate of return)
DR= annual dividends/par
Assume par $100, semiannual dividends
Bond trading with accrued interest vs trading flat? Interest paid based on what time frame?
Calculate accrued interest-
US government bonds
Muni & corporate bonds?
Trade flat= without accrued interest (zero coupon or bond trade SETTLES on interest payment date)
Interest paid is on prior 6 mo, so accrued amount up to settlement belongs to seller. Time from last interest pmt dt through day BEFORE settlement/record dt
Treasuries- actual/365
All others- 30/360
Bond seesaw-
Relationship between market price and interest rates?
Between price and yield?
Between rate and yield?
What is sold at discount, premium, or par?
$———————N—CY–YTM–YTC–%
Market price Interest rate
Inverse relationship
Convertible bonds
Conversion ratio CR
Conversion price CP
What is typical par for bonds?
How to find conversion cost per share, and what is it called?
Conv ratio= par/ conversion price
# shares of stock thst are received if a bond is converted
Conv price= par/ conversion ratio
used to to calculate CR
$1000
SPP (stock parity price)=
Bond market price / conversion ratio
*If mkt price of common stock is HIGHER than conversion cost per share, investor earns cap gain
BPP(bond parity price)=
Common stock price x conv ratio
*If bond market price is BELOW BPP, investor should buy the bond and immediately convert to common stock. Earn cap gain on sale on common stock.
Settlement of US government bonds vs Muni and corporate?
T(trade date) + 1bz day (record date/settlement)
Settle through Federal Funds system
(Government securities initially offered at auction, then trade only OTC. No exchange activity)
Note: options settlement T+1 also
T+2
Settle through clearinghouses
Sales charges-applies to what securities?
Based on what?
Highest possible sales charge?
Redeemables/primary market/prospectus
Ex: mutual fund, UIT
% of POP (pub offering price)
Max 8.5% (or 7.25% if 12b1 fees at max 1%- max distribution. 75%, max service. 25%)
NAV=
Sales charge%=
NAV= assets- liabilities/# outstanding shares
Overall value of a fund on a per share basis. Trades on mutual funds only once a day using forward pricing, always based on next available NAV
SC %= POP-NAV/POP
Find POP if sales charge is in:
Percent
Dollars
POP= NAV/100%-SC%
POP= NAV + SC
Total Return (mutual funds)
All gains and or losses/original cost
(Includes paper/unrealized gains)
Options- formula for premium
Premium = intrinsic value+ time value
**“call up, put down”
With call option, intrinsic value/ITM is present when market price is ABOVE strike price
With put option, intrinsic value/ITM is present when market price is BELOW strike price
Options contract and stock split- what’s the new position (#contracts, # shares per contract, strike price) if:
(A:B split)
Even stock split (ratio ends in 1)
Uneven stock split
Reverse stock split
Find SSF= A/B
Contract (100 shares) X SSF=new #shares**
Strike price/SSF= new strike price
**Even split- adjust # of contracts (at 100 shares each)
**Uneven split- keep same # contracts BUT adjust # of shares per contract
Options contracts and dividends- what is new contract if:
Stock dividends
Regular cash dividends
Special cash dividends
Stock dividend-
SSF is dividends rate as a decimal (ex 10% is 1.10)
Start at 100 shares per contract.
Keep same # of contracts.
Adjust #shares per contract =
# shares in contract × SSF
Adjust strike price= strikeprice/SSF
Cash dividends-
No change
Special cash dividend-
STRIKE price reduced by amount of the dividend.
No change to # contracts or # shares per contract
Long call-
What does this mean?
Market sentiment?
Max gain?
Max loss?
Breakeven?
Hold/own the right to buy
Bullish 🐄 (think market is going up)
MG= unlimited
ML= premium (same for all LONG option positions, regardless of what option action is)
B/E= strike + premium (same for all CALL options, regardless of ownership)
“Call up”
Call is +
Long put-
What does this mean?
Market sentiment?
Max gain?
Max loss?
Breakeven?
Own/hold the right to sell (put it on someone else)
Bearish 🐻- think market is dropping
MG= strike-premium
ML= premium (same for all LONG positions,regardless of type of option)
B/E= strike- premium (same for all PUTs, regardless of ownership)
“Put down”
Put is -
Short call-
What does it mean?
Market sentiment?
Max gain?
Max loss?
Breakeven?
Naked! Cover the short with?
Obligation/writer to sell (someone else can call it in)
Bearish 🐻
MG= premium (same for all SHORTs regardless of option action)
ML= unlimited 😨
B/E= strike + premium (same for all CALLs, regardless of ownership)
Short call covered with:
Long shares
Long call
Rights or warrants
Convertible securities
“Call up”
Call is +
Short put-
What does it mean?
Market sentiment?
Max gain?
Max loss?
Breakeven?
Naked!! Cover short put with?
Obligation/writer to buy (someone can put it on you)
Bullish 🐄 - think market is going up
MG= premium (same for all SHORTs, regardless of option action)
ML= strike- premium
B/E= strike- premium (same for all PUTs, regardless of ownership)
Short put covered with:
Short shares
Long put
Cash
“Put down”
Put is -
Comparing tax free muni bonds to fully taxable corporate bonds
TFEY tax free equivalent yield=
Corporate yield X (100%-tax bracket%)
To compare to muni bond
TEY tax equivalent yield =
Muni bond yield/ (100%- tax bracket)
To compare to the (higher) corporate bond rate
Note- refers to Federal tax only. If savings on State income tax also apply, TEY will be higher bc you’re getting a two pronged tax exemption
Settlement for US government securities and options
T+1
Value of a right
Trading with the right
Trading without the right
Cum rights trade prior to ex date
Mkt price - subscription price /
rights needed per new share +1
ex rights trading on or after ex date
Market price - subscription price / rights needed per new share
Debt coverage ratio
Used when analyzing REVENUE Municipal bonds
Comparing annual available revenues (available to pay debt) to annual debt service
Coverage = available revenues / annual debt svc requirement
Higher numbers are better
debt service - current principal & interest due plus any sinking fund obligation
DPP- cost basis (formula)- when is it adjusted?
(Annual deductions of expenses can’t exceed your adjusted basis. Can carry losses forward if they exceed basis)
DPP risks- p.326-7
Investment in partnership + share of Recourse debt (+ share of REAL ESTATE Non-recourse debt) - cash or property distributions
Adjusted annually
Risks:
Liquidity
Legislative
Leverage
Audit
Depreciation recapture
Capital gain or capital loss formula
Options contracts- gain/loss & taxes
-Expire
-Closing transaction
-Exercise
Cap gain/loss= proceeds - basis
If you buy a security & have an option, basis is adjusted to factor in premium for option
If you have an option and sell a security, proceeds are adjusted to factor income or loss from contract premium
Expire?
Buyer = STCL
Seller= STCG or- if LEAP help more than 12mo, LTCG
Closing transaction- cap gain or loss
Exercise- taxes deferred until stock position is closed.
Sell the stock? Adjust proceeds
Buy the stock? Adjust basis
After tax return
After tax return = taxable investment return / 100- tax rate
(Recall TFEY in muni & Corp bonds)
Current ratio
Combined with working capital for measure of liquidity
Quick asset ratio (acid test ratio) aka quick ratio
WC= current assets- current liabilities
Note: declaration a cash dividend affects WC bc it becomes a current liability (dividends payable).
Paying a previously declared cash dividend does not, bc you’re reducing BOTH cash (current asset) and dividends payable (current liability)
CR= current assets / current liabilities
Higher ratio means more liquid
QAR= (curr assets- inventory)/ current liabilities
Book value per share
Liquidation value of company, on a per share basis
Leaves out intangibles bc they may not be worth what’s listed on the books
Book value per share=
Tangible assets - liabilities - par value of preferred stock /
#outstanding shares of common stock
Dividend payout ratio
Amount of earnings that got paid out to shareholders
Div payout ratio=
annual divs (per common share)/
EPS
Utility companies have v high ratio, followed by well established companies
Growth companies tend to retain their earnings
Debt service coverage ratio
Measures ability to pay debts
Debt service coverage ratio=
Net operating income/
Debt service requirements
Net operating income =
Gross income- operating expenses
Margin accounts
Long margin acc
Short margin acc
Restricted account
LMV-DR= EQ
Long market value (MV of securitiesheld) - debit register (amount $$ borrowed) = equity in securities held by customer
CR- SMV=EQ
Credit register (amount $ customer got from short sale)- Short market value (MV of securities customer will need to buy back & return to lender)= equity , or net worth of investor’s margin acc
equity %=
net equity($)/ net position (LMV or SMV)
Restricted when equity <50%. If restricted, half of sales proceeds must go to pay down borrowed funds.
MINIMUM to avoid firm selling off your stuff?
25% long
30% short
Unrestricted (50%+ equity balance maintained)? Can sell securities and withdraw cash
Market value at maintenance
Short market value at maintenance
How low can LMV fall before a maintenance call is issued)
Minimum LMV= DR/ 0.75
How high can SMV go before a maintenance call is issued?
Maximum SMV= CR/1.3
