EQUATIONS Flashcards
1
Q
Net Worth
A
Assets - Liabilities
2
Q
Current Ratio
A
Current Assets / Current Liabilities
3
Q
Emergency Fund
A
Current Assets / Non-discretionary Expenses
4
Q
Housing Ratio 2: Housing and all other debt ratio
A
Monthly Housing Costs (P+I+T+I) + all other recurring debt payments / Monthly gross income
<= 36%
5
Q
ROI
A
(ending investments - beginning investment - savings - gifts received) / (average invested assets)
average invested assets = (beginning investments + ending investments) /2
savings = annual salary - fixed expenses - variable expenses
6
Q
Savings Ratio
A
= Annual Savings (EE + ER contributions) \ Annual Gross Income
7
Q
ARM (Adjustable Rate Mortgage)
A
= current adjustable mortgage rate + X)
X = 2/X
8
Q
Housing Ratio 1
A
Monthly Housing Costs (P+I+T+I) / Monthly Gross Income
<= 28%
9
Q
Margin Call
A
loan amount / (1 - maintenance margin)
loan = stock price * (1 - initial margin requirement)
10
Q
Total Expected Return
A
= (expected return * probability of return) + (expected return * probability of return)….
11
Q
coefficient of variation
A
CV = Standard deviation / Average Return
12
Q
Covariance
A
COV = (std dev A) * (std dev B) * (correl coeff AB)
13
Q
Correlation Coefficient
A
Correlation coeff AB = COV AB / (std dev A)*(std dev B)
14
Q
Capital Market Line CML
A
Rp = Rf = std dev (p) * ((Rm - Rf)/ std dev (m))
15
Q
Information Ratio
A
IR = (Rp - Rb)/ std dev (A)
Rp = portfolios actual return
Rb = return of the benchmark
Rp - Rb = excess return
Std dev A = tracking error of active return
16
Q
Treynor Index
A
Tp = Rp - Rf / Bp
Rp = realized return on the portfolio
Rf = risk free rate of return
Bp = beta of portfolio
17
Q
Jensen’s Alpha
A
ALPHA p = Rp - {Rf + (Rm - Rf)Bp]
Rp = realized portfolio return
Rf = risk-free rate of return
ALPHA p = alpha, the intercept that measures the managers contributions to the portfolio return
Bp = beta of the portfolio
Rm = expected return on the market
18
Q
Holding Period Return
A
((selling price - purchase price) +/- CFs) / (beginning)
Dividends: +
Margin: -
taxes: -
19
Q
Effective Annual Rate (EAR)
A
= (1 + i/n)^n - 1
20
Q
Arithmetic Mean
A
= a1 + a2 + a3 + an / n
21
Q
Geometric Mean
A
n SQRT a1a2…an
a1= set of given stock prices over period of time
22
Q
Weighted Average Share Price
A
(# of shares* share P) + (# of shares * share P)… / (Share P + Share P +…)
23
Q
Weighted Average Portfolio Return
A
= (FMV/TPV * % return) + (FMV/TPV * % return)…
24
Q
Weighted Average Portfolio Beta
A
= (FMV/TPV * Beta) + (FMV/TPV * Beta)…
25
Dividend Discount Model
V = D1(*1+g) / (r - g)
```
r = required rate of return
g = dividend growth rate
D1 = Next period's dividend = D0(1+g)
```
26
Expected Rate of Return
r = (D1 (*1+g)/ p) + g
```
r = rate of return
p = market price
v = value
```
27
P/E Ratio
- represents how much an investor is willing to pay for reach dollar of earnings
- measure of the stocks price to it's earnings
useful to value a stock if the firm pays no dividends
AKA P/E multiplier
= Price per Share / EPS
Div 0 = EPS * (1 - retention)
28
P/E Ratio
Price per Share / EPS
29
Price / Earnings to Growth (PEG) Ratio
= Stocks PE Ratio / 3-5 year growth rate earnings
30
Dividend Payout Ratio
= Common Stock Dividend / Earnings Per Share
31
Return on Equity (ROE)
= EPS / stockholders equity per share
stockholders equity per share = total equity / shares outstanding
32
Dividend Yield Formula
= dividend / stock price
33
Average Price Per Share
total cost / # of shares
34
Tax Equivalent Yield
= r / (1-t)
= corporate rate * (1 - marginal tax rate)
r= tax exempt yield
t = marginal tax rate
= (corporate rate) * (1-marginal tax rate)
35
TEY Both Fed and State Taxes
= tax exempt yield / (1 - [fed tax rate + state tax rate (1- fed tax rate)]
this is used if the client itemizes the deductions
36
Coupon Rate or Nominal yield
= Coupon payment / Par
37
Current Yield
= Coupon Payment / price of bond
38
YTM
39
Conversion Value
CV = (Par / CP) * Ps
Ps = price of the common stock
CP = conversion price
(1,000 / CP) = conversion ratio or # of shares the convertible can be converted into
40
Property Valuation Formula
capitalized value = Net Operating Income / Capitalization Rate
41
Capitalized Rate
= NOI / cost
42
Net Operating Income
```
=
Gross rental receipts
+ Non-rental income
_______________
= potential gross income
- vacancy and collection losses
_______________
effective gross income
- total expenses
_______________
= net income
+ interest expense
+ depreciation expense
_______________
= Net Operating Income
```
- cash operating expenses does not include deprec or amortiz, which are not cash expenses
excludes payments on debt service this is a financing expense, not an operating one
43
NAV
= (Assets - liabs) / shares outstanding
44
donee's basis
= Donors basis + (( net apprec in value of gift / value of taxable gift) * gift tax paid)
45
Gain on Asset
= sale price - net appreciation
46
Basis for Sales Purposes
= (Amount Realized / FMV) * Basis of property
47
Realized Gain/Loss
= Amount Realized - adjusted basis
48
Adjusted Basis
= Cost of Property + capital additions - cost recovery
49
Amount Realized on the sale/exchange of an asset
= sum of cash received + FMV of property received in exchange + liabilities shed
50
Recognized Value
= depreciation - Straight line depreciation
51
1250 Loss Calculation
= sale price
- Adjusted basis (Purchase price - depreciation)
_________________
= Total Gain
- Ordinary Income (excess depreciation)
_________________
Remaining Gain
===============
Taxed at 25% (Total depreciation - excess depreciation)
Section 1231 Gain (sale price > purchase price)
52
New Asset Basis using IRC approach
- Beware!!
```
Adjusted Basis of like-kind asset given
+ Adjusted basis of boot given
+ Gain recognized
- FMV of boot received
- loss recognized
= Basis in new asset
```
53
Basis in like-kind asset received
FMV of new asset
- gain not recognized
+ Loss not recognized
54
Basic Income Tax Formula
```
INCOME
- exclusions from income
_________________
Gross Income
- deductions for AGI
_________________
AGI
- the greater of standardized or itemized deductions
- any QBI * 20% deduction
_________________
Taxable Income
```
Tax on Taxable income
- tax credits (including fed income tax w/h and other prepayments of fed income taxes)
_________________
Tax due (or refund)
55
Exclusion ratio
= adjusted basis / fmv = exclusion %
(exclusion % * distribution received) = not subject to income tax
distribution received - (exclusion % * distribution received) = subject to income tax
56
Ratio of AB
= AB before withdrawal / FMV of account at withdrawal
57
Business Asset Depreciation Recapture
= Original Purchase Price
- Accelerated Depreciation Amount
- Straight Line depreciation
= After Tax Basis
Selling Price
- After Tax basis
= Gain/Loss
Gain/Loss
- Accelerated Depreciation (Ordinary Income)
- Straight Line Depreciation (25% Unrec 1250)
= leftover is 1231 LTCG
58
Adjusted Basis
= Original cost (or other adjusted basis
+ capital additions
- capital recoveries
59
Appreciated Property with Gift Tax Paid
= Donor's basis + (Net Appreciation in Gift / Taxable gift) * Gift tax paid
60
Equivalent TF Rate for taxable bond
= interest rate * (1 - marginal tax rate)
61
MFJ IRA contribution phaseout amount
Reduction = Contribution Limit × AGI-Lower Limit ÷ $20,000
$109,000 - $129,000
62
Straight Line Depreciation Equation
```
adjusted basis
- salvage value
____________
= depreciable amount / estimated useful life
____________
= annual depreciation deduction
```
63
Cost depletion method
deduction amount = (asset basis / estimated total # of recoverable units of the assets) * # of units sold (not produced
64
Percentage Depletion Method
= % is applied to the GI from the property (limited to 50% of the GI)
65
Self-Employment Tax
= Net Self-Employment Income
* .9235
______
- net earnings subject to self-employment tax
* .0153 self employment tax rate ( up to wage base of $147,000)
______
= self-employment tax
66
Self-Employed Individual's contribution
```
net self-employment income
* (1/2) self-employment taxes
________
= Adjusted Net Self-Employment Income
* (.20)
_______
= self-employed individuals qualified plan contribution
```
67
Tax Formula for a C Corp
```
= Total Income
- exclusions from GI
___________
= GI
- deductions
___________
= taxable income
```
68
Personal Income Tax Return for S corps reportable income
= reported taxable income * (# days held / 365) * (# of shares / S corp total # of shares)
69
Tax Ramifications of Withdrawals/Distributions from an S corp
- distributions from an S corp to a shareholder follow the rules applying to distributions from partnerships
- distributions from an S Corp are considered nontaxable to the extent of the shareholders basis in the stock
- any distribution in excess of the stock adjusted taxable basis is treated as cap gain
70
Advantages of S Corps
- income is passed through to the shareholders for fed income tax purposes
- income is taxed at the individual level which may be a lower tax rate than the applicable corp rate
- shareholders have limited liability
- Distributions from S corps are exempt from the payroll tax system, assuming the corps provide adequate comp to those shareholders who are EEs of the corp
71
Disadvantages of S corps
- limited to 100 shareholders
- only 1 class of stock is allowed
- cannot have corp, partnership, certain trust, or nonresident alien shareholders
- shareholder EEs owning more than 2% of the company must pay taxes on a range of EE fringe benes that would be TF to a shareholder/EE of a C corp
- tax rate of the individual shareholder may be higher than the corp tax rate
- borrowing may be difficult w/o stockholder personal guarantees, which negates part of the advantage of limited liability
72
Flow through entities
- if you have significant personal income and you expect biz to have losses
73
LLC taxed as a partnership
- if you want to be able to allocate income/losses in %s different than ownership
74
sole proprietorships and general partnerships
- avoid these if you are concerned about liability
75
C corp
- consider this if significant income is expected from the biz
76
Personal Holding company
a corp is this if both of the following requirements are met:
- Personal Holding Company Income Test - At least 60% of the corps adjusted ordinary GI for the tax year is from dividends, interest, rent and royalties
- stock ownership requirement - at any time during the last half of the tax year, more than 50% in value of the cops outstanding stock is owned, directly or indirectly, by 5 or fewer individuals
77
S corp
- provides flow-through accounting so she can offset OI with business losses
78
C Corps
- entitled to a dividends-received deduction of 100% if they own 80% or more of the company paying the dividend
79
Deductions for Business Income from Pass-through entities and sole proprietorships
- an individual may deduct 20% of QBI from partnership, S Corp, or sole prop, as well as 20% of aggregate qualified REIT dividends, qualified cooperative dividends, and qualified publicly traded partnership income. the 20% deduction is not allowed in computing AGI but rather is allowed as a deduction reducing taxable income
- a limit based on W2 wages paid is phased in for MFJ taxpayers with taxable income of $340,100 or more ($170,050 for other individuals). A disallowance of the deduction with respect to specified service trades or biz also is phased in above these threshold amounts of taxable income. A specified service trade or biz means any trade or biz involving the performance of services in the fields of health, law, consulting, athletics, financial services, brokerage services, or any trade or biz where the principal asset of such trade or biz is the reputation or skill of 1+ of its EEs or owners, or which involves the performance of services that consist of investing and investment management trading, or dealing in securities, partnership interests
