chapter 20 (7 questions) Flashcards
analytical methods (26 cards)
Future Value
rate of return it earns (r); and
number of years over which it is invested (n).
The equation to calculate the FV of an investment is expressed as:
= Present Value times (1 plus interest rate) raised to the power of the number of years
FV = PV × (1 + r)n
Present Value
value today of the future cash flows of an investment discounted at a specified interest rate to determine the present worth of those future cash flows.
The formula used to calculate present value is as follows:
PV = FV ÷ (1 + r)n
Rule of 72
shortcut method for determining the number of years it takes for an investment to double in value assuming compounded earnings. To find the number of years for an investment to double, simply divide the number 72 by the interest rate the investment pays
the difference between an investment’s present value and its contemporaneous cost (current market value, or CMV)
Net Present Value
Beta Coefficient
Beta is used to measure the variability between a particular stock’s (or portfolio’s) movement and that of the market in general. A stock with a beta of 1.00 will tend to have a market risk similar to that of the market as a whole.
Alpha
good news is when they can say that they have generated positive alpha. Basically, that means that their investment performance is better than what would have been anticipated, given the risk in terms of volatility that was taken.
Alpha Formula
(Actual portfolio return – risk-free rate) – (portfolio beta × [market return – risk-free rate]) or
(🐕-🐢)-((BetaX(🐘-🐢))
Definition: risk-free rate. T
The risk-free rate used on the exam will always be the 91-day (or 13-week) U.S. Treasury bill. Because their price movements are not generally related to the stock market, those T-bills are said to have a beta of zero.
Standard deviation
a measure of volatility of
a security compared to the Overall Market (includes both systemic and unsystemic risk) Standard deviation is a statistical term that measures the amount of variability or dispersion around an average
Working Capital
the amount of capital or cash a company has available. Working capital is a measure of a firm’s liquidity, which is its ability to quickly turn assets into cash to meet its short-term obligations. current assets – current liabilities = working capital
Current Ratio
Simply divide the current assets by the current liabilities, and the higher the ratio, the more liquid the company is.
Quick Asset Ratio (Acid Test Ratio)
uses the company’s quick assets instead of all of the current assets. Quick assets are current assets minus the inventory. Then divide these quick assets by the current liabilities to arrive at the quick ratio.
Debt-to-Equity Ratio
The best way to measure the amount of financial leverage being employed by the company
Book Value Per Share
duration
the measure of sensitivity of a debt security when faced with a change in interest rates
actors that increase working capital include increases in cash from:
1-the sale of securities (long-term debt or equity);
2-profits from the business operations; and
3-the sale of noncurrent assets, such as equipment no longer in use.
Factors that decrease working capital include increasing current liabilities such as:
1-declaring cash dividends;
2-paying off long-term debt whether at maturity or, if called, earlier; and
3-net operating losses.
Current Yield
Current yield
annual dividends per common share/market value per common share
Dividend Payout Ratio
annual dividends per common share/
earnings per share (EPS)
Price-to-Earnings (P/E) Ratio
current market price of common share/
earnings per share (EPS)
price-to-book ratio
the market price of the common stock relative to its book value per share. It is the current market price divided by the book value per share
Russell 2000 Index
measures the performance of the small-cap segment of the U.S. equity universe. It includes approximately 2,000 of the smallest securities based upon their market capitalization (minimum market cap of $300 million). Like most of the others, it is market-cap weighted with the median market cap being something approximating $600 million
eafe
MSCI EAFE (it was developed by Morgan Stanley Capital International), is an index of foreign stocks. The index is market capitalization weighted. The EAFE acronym stands for Europe, Australasia, and Far East.
Wilshire 5000
5000 Total Market Index℠ measures the performance of all U.S. equity securities with readily available price data. cap-weighted index
