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68 Cards in this Set
- Front
- Back
Return on Equity (ROE)
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The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested.
** Does not include preferred stock in SHE** =Net Income/Shareholder's Equity |
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Return on Assets (ROA)
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An indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company's annual earnings by its total assets, ROA is displayed as a percentage.
= Net Income/Total Assets *Add back interest expense to ignore the cost of borrowing in the calculation* |
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Market to Book (M2B)
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A ratio used to find the value of a company by comparing the book value of a firm to its market value. Book value is calculated by looking at the firm's historical cost, or accounting value. Market value is determined in the stock market through its market capitalization.
= Book Value/Market Value In basic terms, if the ratio is above 1 then the stock is undervalued; if it is less than 1, the stock is overvalued. |
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Return on Invested Capital (ROIC)
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A calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. The return on invested capital measure gives a sense of how well a company is using its money to generate returns.
One downside of return on capital is that it tells nothing about where the return is being generated. For example, it does not specify whether it is from continuing operations or from a one-time event, such as a gain from foreign currency transactions. = EBIT (1-tax rate) / Equity + IBD |
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Basic Earnings per Share
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Used to calculate how much earnings per share were earned within the period.
= (After-tax Net Income - Preferred Dividends) / # of Shares Outstanding |
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Diluted Earnings per Share
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Same as above but removes things that "dilute" eps, like convertible preferred stocks, convertible bonds, and stock warrants (options).
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Net Profit Margin (NPM)
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After Tax Net Income / Sales
Ratio shows how much profit a company makes for every dollar in revenue |
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P/E Ratio
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Share price / EPS OR Market Cap / Net Income
Shows how much investors are willing to pay per dollar of earnings |
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Asset Turnover
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Sales / Total Assets
Determines how efficiently a firm uses its assets *Low values indicate that the firm is not generating much profit per dollar of assets. |
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Financial Leverage Ratio
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Assets / Equity
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EV
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Market Cap + IBDebt - Cash
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Dupont Analysis
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NPM (Profit/Sales) x Total Asset Turnover (Sales/Assets) x Financial Leverage (Assets/Equity)
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EBIT
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Earnings Before Interest and Tax: Revenue-CGS-Operating expenses-Depreciation + Amortization
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EBITDA
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Earnings Before Interest, Tax, Depreciation, and Amortization
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Gross Profit Margin
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(Revenue- COGS) ÷ Revenue
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Quick Ratio (Acid Test)
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(Cash+ Marketable Securities +Receivables) ÷ Current Liabilities
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Current Ratio
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Current Assets÷ Current Liabilities
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Cash Ratio
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(Cash + Cash Equivalents) ÷ Current Liabilities
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Working Capital
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Current Assets- Current Liabilities
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Accounts Receivable Turnover
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Net Credit Sales ÷ Avg. Accounts Receivable
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Inventory Turnover
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COGS ÷ Inventory
OR Sales ÷ Inventory |
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Accounts Payable Turnover
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Total Purchases ÷ Accounts Payable
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Debt to Equity
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Total debt (B.S.) ÷ Total Equity (B.S.)
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Debt to Assets
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Total Liabilities ÷ Total Assets
This measure helps to assess a company’s financial risk bearing, or how much debt they take on. |
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Times Interest Earned
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EBITDA ÷ Interest
High values show that a firm can pay interest payments. |
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Financial Leverage (Equity Multiplier)
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Total Assets ÷ Total Equity
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Market Capitalization
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The number of shares outstanding x Market price per share
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PEG (P/E to Growth)**
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PE Ratio (Share Price ÷ EPS) ÷ Annual EPS growth
The ratio of a firm’s P/E to an expected growth rate *Indicates overpriced or underpriced stock price The lower the ratio, the more undervalued the stock is |
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Debt to Market Equity
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Liabilities ÷ Market Capitalization (number of outstanding shares x share price)
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Sustainable Growth
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(ATNI ÷ Stockholder’s Equity) x (1- Dividend Payout Ratio
*Dividend Payout Ratio= Dividends ÷ ATNI |
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Actual Growth
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Sales (Year 1) ÷ Sales (Year 2)
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Sole Proprietorship
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Business owned and run by one person. No separation b/w firm and owner. Unlimited personal liability for the firm's debts on owners part. Limited to the life of the owner.
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Partnership
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Business owned and run by more than one person. All partners are personally liable for debt. Ends with the withdrawal or death of any partner.
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Limited Partnership
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Same thing as a partnership except two different kinds of owners, general and limited. If one is a limited partner, their liability is limited to their investment in the company.
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Limited Liability Company (LLC)
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A limited partnership but without a general partner. They also run the business.
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Corporation
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A legally defined, artificial being (legal separate entity) that is separate from its owners. It can enter into contracts, acquire assets, and incur obligations. Also enjoys protection under the U.S Constitution against the seizure of its property. It must be legally formed, and is therefore a lot more costly then say a sole proprietorship.
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Double Taxation
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Since a corporation is a separate legal entity, it is subject to taxation separate from its owners. In effect, stockholders of a corporation pay taxes twice. First on the profits of the corporation and then on the dividends of the shareholders.
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Financial Manager + Tasks
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They have three tasks in a company: make investment decisions, make financing decisions, and manage short-term cash needs.
He must ensure that the firm has enough cash on hand to meet its obligations day to day. His goal: To maximize the wealth of the owners. |
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Board of Directors
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A group of people who the ultimate decision making authority in the corporation.
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CEO
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Chief Executive Office: He is charged with running the corporation by instituting the rules and policies set by the board of directors.
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Agency Problem
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When managers, despite being hired as the agents of the stockholders, put their own self interest ahead of the interests of those shareholders.
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Hostile Takeover
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An individual or organization-- sometimes known as a corporate raider--ca purchase a large fraction of the company's stock and in doing so get enough votes to replace the board of directors and the CEO.
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Primary Market
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Refers to a corporation issuing new shares of stock and selling them directly to investors.
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Secondary Market
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Shares continue to trade in a secondary market between investors without the involvement of the corporation.
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Bid-Ask Spread
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The difference between the bid price and the asking price, the spread is considered a transaction cost that one has to pay in order to trade.
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Over-the-counter-markets
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A collection of dealers or market makers connected by computer networks and telephones.
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Important Difference between NYSE and NASDAQ
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On the NYSE there is only one market maker per stock, whereas on the NASDAQ stocks can and do have multiple market makers and they compete with each other.
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Banks + Credit Unions
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Source of money : Deposits (savings); they loan to people and businesses
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Insurance Companies
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Source of money: premiums and investment earnings ; invests mostly in bonds and some stocks, using the investment income to pay claims
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Mutual Funds
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Source of money: people's investments (savings) ; Buys stocks, bonds, and other financial instruments on behalf of its investors.
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Pension Funds
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Source of money: retirement savings contributed through the workplace ; Similar to mutual funds except with the purpose of providing retirement income
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Hedge Funds
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Source of money: investments by wealthy individuals and endowments ; Invests in any kind of investment in an attempt to maximize returns.
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Venture Capital Funds
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Source of money: investments by wealthy individuals and endowments ; Invests in start-up, entrepreneurial firms
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Private Equity Funds
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Source of money: investments by wealthy individuals and endowments ; Purchases whole companies by using a small amount of equity and borrowing the rest.
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Value Stocks
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Firms with a low M2B ratio
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Growth Stocks
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Firms with a high M2B ratio
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Management Discussion and Analysis
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The preface to the financial statements in which the company's management discuss the recent year, providing a background on the company and any significant events that may have occurred.
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Off-Balance Sheet Transactions
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Transactions or arrangements that can have a material impact on the firm's future performance yet do not appear on the balance sheet.
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Sarbanes-Oxley Act (SOX)
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The idea of the act was to improve the accuracy of information given to both boards and to shareholders. In three ways:
1) Overhauling incentive and independence in the auditing process 2) Stiffening penalties for providing false information, and 3) by forcing companies to validate their internal financial control processes. |
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Arbitrage
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The practice of buying and selling equivalent goods in different markets to take advantage of the price difference.
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Discounting
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the process of finding the equivalent value today of a future cash flow.
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Perpetuity
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A stream of equal cash flows that occur at regular intervals and last forever*
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Present Value of a Perpetuity
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C / r
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Annuity
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A stream of cash flows consisting of a fixed number of equal cash flows paid at regular intervals
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Present value of an Annuity
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PV = C x (1/r) (1 - (1/(1+r^n)))
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Future value of an annuity
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FV = PV x (1+r)^n
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Growing Perpetuity
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A stream of cash flows that occur at regular intervals and grow at a constant rate forever.
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Present Value of a growing perpetuity
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PV = C / (r-g)
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