Unit 10: Analytic Methods Flashcards
How do you calculate Future value?
FV=PV x (1 + r) ^n
FV=Future Value
PV=Present Value
r=rate of return
n=number of years invested
(1 + r) ^n= discount rate
What is the rule of 72?
The time it takes for an investment’s value to double
72/r=years
72/years to double=r
r=rate of return
How do you calculate Net Present value?
NPV= PV-price paid
Positive NPV is good, Negative NPV is bad
NPV generally considered more important than IRR
What is Internal Rate of Return?
IRR : The discount rate that makes NPV =0
IRR is the method of computing long-term returns that takes into consideration the time value of money.
The Yield to maturity of a bond reflects its IRR
Shown as a %
What is Mean?
average - take all values and divide by number of values
What is Median?
Midpoint of all values
What is Mode?
most common value (number that occurs most often)
What is the Geometric Mean?
Doesn’t matter, but know that it is always lower than arithmetic mean
What is Beta?
A stock’s risk compared to market
What is Alpha?
Performance compared to market
A= (portfolio return - risk free rate)- (beta x (market return-risk free rate))
What is most commonly considered to be the risk free rate?
The rate of return for a 90 day T bill
What is standard deviation?
Measurement of Volatility
Investments generally stay within 1 Standard deviation 2/3 of the time and 2 standard deviations 95% of the time
What is a correlation coefficient?
Number between -1 and +1 representing relationships between investments
-1 prices move opposite of each other
0 prices unrelated to each other
1 prices move in tandem
Goal of index funds are to perfectly correlate with the index (+1)
What is working capital?
current assets-current liabilities
How do companies increase their working capital?
issuing securities, profits from business operations
What is a Quick Asset Ratio?
AKA Acid Test
ratio of quick assets (NOT inventory) vs current liabilities
What is Book value per share?
the liquidating value of the company, not it’s intrinsic value
(tangible assets-liabilities-par value of preferred)/shares of common stock outstanding
What is the Price to Book Ratio?
Market price of common stock / book value per share
What is the Price to Earnings Ratio (P/E)?
current market price of common share/earnings per share (EPS)
Note: Growth companies have higher PE ratios than Cyclical or defensive companies
What is Earnings per Share (EPS)?
earnings available to common stock shareholders/number of shares outstanding
NOTE: EPS relates to common stock only. Preferred stockholders have no claims to earnings beyond the stipulated preferred stock dividends
What are earnings available to common?
earnings available to common= remaining earnings after preferred dividend has been paid
What is Earnings Per Share after Dilution?
assumes all convertible securities have been converted into common stock, diluting and reducing EPS
What is Current Yield (Dividend Yield)?
annual dividend payout as a percentage of the current stock price
= annual dividends per common share / market value per common share
