Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

AcF100 > Measures of Return on Investment and Risk > Flashcards

Measures of Return on Investment and Risk Flashcards

1
Q

What does dividend yield measure?

A

equity shareholder’s annual cash return on
investment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

If the dividend yield of Sainsburys is 1.56%, what does that mean?

A

Sainsbury’s shareholders receive 1.56% dividend for every
£1 invested (at current share price levels)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What does the dividend yield tell us?

A

how much of the investment does the company return in cash

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

High dividend yield means…

A

a higher portion of profits back to investors
through dividends.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What does the dividend cover show us?

A

Shows number of times dividend is ‘covered’ by current profits

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What does the dividend cover indicate?

A

how likely it is that company will be able to
maintain dividends if profits fall; Measure of risk

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

If Sainsburys dividend cover is 2.08, what does this mean?

A

Sainsburys current profits are over two times its current dividend.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What does earnings per share (EPS) measure?

A

profitability, ability to pay dividends

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What does the profit in EPS represent??

A

profit available for distribution to equity shareholders

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

If Sainsburys EPS is 5.8 pence/share, what does this mean?

A

Sainsbury generated profits of 5.8 pence per share.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Basic vs Diluted EPS

A

-Basic EPS: takes account of all equity shares in issue
- Diluted EPS: takes account of shares that may result if there
are financial instruments which might be converted into shares
in the future because this conversion would ‘dilute’ the EPS

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What does return on equity indicate?

A

performance – how well managers
use funds invested by shareholders

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

How do you know when ROE is good?

A

ROE should exceed cost of equity capital for the firm to be regarded as a success.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What do you need to remove to calculate ROE from the perspective of
parent shareholder?

A

Minority interest

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What is a minority interest?

A

company ownership aside from the parent

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

If Sainsburys ROE is 1.77%, what does this mean?

A

Sainsbury has generated a return of 1.77% on equity invested by controlling shareholders

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What does the price earnings ratio measure?

A

Compares amount invested in one share with earnings per share

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What does the price-earnings ratio represent?

A

the number of years of current earnings that investors are prepared to buy

19
Q

What is a common range for (P/E)?

A

10-25

20
Q

P/E is a reflection of what two main things?

A

Risk: low PE ratio more risk
Expected earnings growth potential: high PE, firm expected to grow

21
Q

What causes variations in PE?

A
  • Overall level of stock market
  • Industry
22
Q

If Sainsburys PE is 36.1, what does this mean?

A

Sainsbury’s investors need 36 years to recoup their investment at current earnings levels

23
Q

What is the market to book ratio?

A

Relationship between stock market value of shareholder equity and accounting value of shareholder equity.

24
Q

What does the market to book ratio indicate?

A

whether a company is under- or overvalued… or whether market expectations of the company are high or
low.

25
Q

If Sainsburys has a market to book ratio of 0.64, what does this mean?

A

Sainsbury investors are paying £0.64 for every £1 of net assets (book equity value)

26
Q

What is interest cover?

A

Finance cost net of finance income; how many times does the profit for the period ‘cover’ the interest that has to paid;

27
Q

What does interest cover indicate?

A

how much of a cushion is there once the
interest is paid

28
Q

If Sainsburys has an interest cover of 1.78, what does this mean?

A

Sainsbury’s current operating profit can cover current interest expense 1.78 times.

29
Q

What is gearing/leverage?

A

the relationship between fixed
interest capital (e.g. loans, debentures, preference shares) and
the amount of equity capital (i.e. shares).

30
Q

Highly geared/leveraged firm =

A

a firm with a lot of debt

31
Q

How is equity calculated?

A

Equity = share capital + share premium account + reserves + retained profits

32
Q

How is debt calculated?

A

Debt = preference shares + loans + bonds + other non-current borrowings

33
Q

Where is the debt-equity ratio used most?

A

Financial press

34
Q

If Sainsburys has a debt equity ratio of 111%, what does this mean?

A

Sainsbury debt is 111% of its equity.

35
Q

What does debt-equity ratio tell us?

A

the proportion of corporate debt to equity.
Typically, higher proportions of debt make the company more risky

36
Q

Where is the gearing ratio used most?

A

Accounting

37
Q

How is debt expressed in a gearing ratio?

A

As a fraction of the total capital

38
Q

If Sainsburys has a gearing ratio of 53%, what does this mean?

A

Sainsbury debt makes up 53% of total capital.

39
Q

What does a higher gearing ratio tell us?

A

Gearing ratio tells us the relative proportion of corporate debt to equity. Typically, higher proportions of debt make the company more risky

40
Q

Is high gearing a good thing?

A

Though it increases profit available for
distribution as dividends and it is deductible for tax purposes, if there is MORE debt there is MORE financial risk and MORE volatility so not good

41
Q

What are the implications of gearing?

A

High risk high reward.
Increase in profit (before charging interest) in high geared company will result in a proportionately greater increase in
the profit compared with the low geared company- but the REVERSE occurs BAD times.

42
Q

What are indicators of good investments (better future expectations)?

A

-High P/E
-High MTB

43
Q

What are indicators of low risk?

A

-High P/E
-High interest cover
-Low gearing ratios

AcF100 (4 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions