Calculations

Question 1

What is the current yield (stock)?

Answer 1

annual dividend/current market price

the return on the investment that the buyer can expect to experience

Question 2

What is the current yield (bond)?

Answer 2

annual interest/current market price

this is the rate of return on a bond investment

Question 3

What is the tax-free equivalent yield?

Answer 3

corporate rate x (100% - tax bracket)

Question 4

What is the tax-equivalent yield?

Answer 4

municipal rate/(100%-tax bracket)

the return a taxable bond would need to yield in order to equal the yield on a comparable tax-exempt bond

Question 5

How do you calculate the NAV of a mutual fund share?

Answer 5

fund NAV/number of shares outstanding

Question 6

How do you calculate the Dollar Cost Average?

Answer 6

total dollars invested/number of shares purchased

Question 7

How do you calculate shareholder’s equity?

Answer 7

Assets - liabilities

Question 8

How do you calculate total return?

Answer 8

income (dividends or interest) + gain/loss divided by original investment

Question 9

How do you calculate inflation-adjusted return?

Answer 9

[income (dividends or interest) + gain or loss/original investment] - CPI

Question 10

How do you calculate Alpha when risk-free rate is NOT given?

Answer 10

Actual Return - (Beta x market return)

Question 11

How do you calculate Alpha when risk-free rate is given?

Answer 11

(actual return-RF) - (beta x [market return-RF)}

Question 12

How do you calculate the Sharpe Ratio?

Answer 12

actual return - RF/standard deviation

measures the risk adjusted return of an investment

Question 13

What is Net Working Capital?

Answer 13

current assets - current liabilities

measures an entity’s liquidity OR solvency AKA ability to pay their debts

Question 14

What is Market Cap/Capitalization?

Answer 14

the number of outstanding common shares x market price per share

Question 15

What is the book value per share?

Answer 15

total assets - liabilities / # of outstanding shares

Question 16

What is Negative Net Present Value?

Answer 16

what occurs from the calculation that determines the money generated in the future is NOT worth more than the initial investment cost

Question 17

What is the risk-adjusted return?

Answer 17

return of an investment in relation to the degree of risk taken

Question 18

What is the Dividend Discount Model?

Answer 18

used to determine the value of the stock today by determining the present value of all future dividends

Question 19

What is Discounted Cash Flow?

Answer 19

helps determine the value of an investment based on its future cash flows

if the DCF is above the current cost of the investment, the opportunity could result in positive returns

Question 20

What is Net Present Value?

Answer 20

the difference between the present value of cash inflows and the present value of cash outflows over a period of time

used to calculate current total value of a future stream of payments

Question 21

What is the current ratio?

Answer 21

current assets / current liabilities

measures a company’s short term financial health

gauges their ability to pay their current liabilities

Question 22

What is the Gross Domestic Product?

Answer 22

consumer spending + government spending + business spending + exports - imports

national output of goods and services

broad measure of economic health

Question 23

What is the Balance Sheet Equation?

Answer 23

assets - liabilities = net worth

tells you the net worth of a company

a moment in time, snap shot of the net worth

Question 24

What is cash flow? How do you calculate it?

Answer 24

net income (or loss) + current depreciation + amortization

actual cash generated by operations

Question 25

What is the Quick Ratio (Acid Test Ratio)?

Answer 25

current assets - inventory / current liabilities

stricter measurement of a company’s abilities to pay its short term obligations

Question 26

What is the debt to equity ratio?

Answer 26

total liabilities / stockholders equity

measures how risky a business’ capital structure is

how leveraged (how much in debt) a corporation is

Question 27

What is the dividend payout ratio?

Answer 27

annual dividend / earnings per share

measures generosity of the issuer’s board of directors

shows an investor how much of the year’s earnings were returned to shareholders

Question 28

What is future value?

Answer 28

the value of a current asset at some point in the future based on an assumed rate of growth

FV = I x [I + (R x T)}

I = investment amount
R = interest rate
T = # of years

Question 29

What is the price to earnings ratio?

Answer 29

market price / earnings per share

compares the stock’s current market price relative to its earnings per share

used to determine whether a stock is fairly priced in the market

Question 30

How do you find the put spread breakeven?

Answer 30

high strike price - net premium

Question 31

How do you find the call spread breakeven?

Answer 31

low strike price + net premium

Question 32

What are the formulas for a Long Put? (max gain, max loss, breakeven)

Answer 32

Max Gain = (strike price - premium paid) x 100

Max Loss = premium paid

Breakeven = strike price - premium

Question 33

What are the formulas for a short put? (max gain, max loss, breakeven)

Answer 33

Max Gain = premium received

Max Loss = (strike price - premium) x 100

Breakeven = Strike Price - premium

Question 34

What are the formulas for long calls (max loss, max gain, breakeven)?

Answer 34

Max Gain = unlimited

Max Loss = premium paid

Breakeven = strike price + premium

Question 35

What are the formulas for a short call? (max gain, max loss, breakeven)

Answer 35

Max Gain = premium received

Max Loss = unlimited

Breakeven = strike price + premium

Question 36

How do you calculate earnings per share (EPS)?

Answer 36

net income - preferred dividend / common shares outstanding

measures the portion of the issuer’s earnings that is available to common stockholders