Shared Flashcard Set

Details

Level 1 Formulas
from Elan free study guide
473
Finance
Professional
01/20/2013

Additional Finance Flashcards

 


 

Cards

Term
Future Value of a Single Cash Flow
Definition
FVn = PV * (1+r)N
Term
Present Value of a Single Cash Flow
Definition
PV = FV / [(1+r)N]
Term
Present Value of a Perpetuity
Definition
PV(perpetuity) = PMT / (I/Y)
Term
Present Value of an Annuity Due
Definition
PV (Annuity Due) = PV (ordinary annuity) * (1+r)
Term
Future Value of an Annuity Due
Definition
FV (Annuity Due) = FV (Ordinary Annuity) * (1+r)
Term
Future Value with continuous compounding
Definition

FVn = PV * (ers*N)

 

 

Term
Effective Annual Rates
Definition
EAR = (1+Periodic interest rate)N - 1
Term
Net Present Value
Definition
NPV = Σ[CFt / [(1+r)t]
Term
Bank Discount Yield
Definition

rBD = [D/F] * [360/t]

rBD = annualized yield on a bank discount basis

D = dollar discount (face value - purchase price)

F = face value of the bill

t = number of days until maturity

Term
Holding Period Yield
Definition
[[(P1+D1)] / P0] - 1
Term
Effective Annual Yield
Definition

EAY = [(1+HPY)365/t] - 1

HPY = holding period yield

t = number of days until maturity

Term
Money Market Yield
Definition

Rmm = [360*rBD] / [360-(t*rBD)]

 

Rmm = HPY*(360/t)

Term
Bond Equivalent Yield
Definition
BEY = [(1+EAY).5 - 1]
Term
Population Mean
Definition
μ = Σxi / N
Term
Sample Mean
Definition
X = Σxi / n
Term
Geometric Mean
Definition
Rg = [[(1+r1) * (1+r2) ... (1+rt)](1/t)] - 1
Term
Harmonic Mean*
Definition

X = Number of observations / Σ(1/xi)

 

*Find what this measures/when it's used

Term
Percentiles
Definition

Ly = [(n+1)*y] / 100

y = percentage point at which we are dividing the distribution

Ly = location (L) of the percentile (Py) in the data set sorted in ascending order

Term
Range
Definition
Range = Maximum value - Minimum value
Term
Mean Absolute Deviation
Definition

MAD = Σ|xi-X| / n

 

n = number of items in the data set

X = mean

| | = absolute value

 

Term
Population Variance
Definition

σ2 = Σ(xi-μ)2 / N

 

Variances = observation - population mean

Term
Population Standard Deviation
Definition

σ = [Σ(xi-μ)2 / N]1/2

 

 

Term
Sample Variance
Definition
s2 = Σ(xi-X)2 / (n-1)
Term
Sample Standard Deviation
Definition
s = [Σ(xi-X)2 / (n-1)]1/2
Term
Coefficient of Variation
Definition

s/X

 

Sample standard deviation / sample mean

Term
Sharpe Ratio
Definition

[rp-rf] / sp

 

(mean portfolio return - risk free return) / standard deviation of portfolio returns

Term
Sample skewness
Definition

sk = [n / [(n-1)(n-2)]]  *  [Σ(xi-X)3 / s3]

 

As n becomes large, the first term reduces to 1/2

Term
Sample Kurtosis
Definition

[ [ [n*(n+1)] / [(n-1)(n-2)(n-3)] ] * [(Σ(xi-X)4 / s4] ]   -  [ [3(n-1)2] / [(n-2)(n-3)] ]

 

As n becomes large, the first term becomes 1/n and the third term becomes 3

Term
Odds for an event
Definition

P(E) = a / (a+b)

 

Odds of "a" to "b"; switch numerator to b for probability of "b" to "a"

Term
Conditional Probabilities
Definition

P(A|B) = P(AB) / P(B)

 

Probability of A given B is the probability of A and B over Probability of B

Term
Multiplication Rule for Probability
Definition

P(AB) = P(A|B) * P(B)

 

Probability of A and B is the probability of A given B times the probability of B

Term
Addition rule for Probabilities
Definition
P(A or B) = P(A) + P(B) - P(AB)
Term
Probability for Independent Events
Definition

P(A|B) = P(A)

 

P(A or B) = P(A) + P(B) - P(AB)

 

P(A and B) = P(A) * P(B)

Term
The Total Probability Rule*
Definition

P(A) = P(AS) + P(ASc)

 

*Don't know what this is at all

Term
Total Probability Rule for n possible scenarios
Definition

P(A) = P(A|S1) * P(S1) + P(A|S2) * P(S2) + ...+ P(A|Sn) * P(Sn)

 

Where set of events s is mutually exclusive and exhaustive

Term
Expected Value
Definition

E(X) = Σ P(xi)*xi

 

xi = one of n possible outcomes

Term
Variance and Standard deviation (expected returns)
Definition
σ2(x) = Σ P(xi)*[(xi - E(X))2]
Term
Total Probability Rule for Expected Value
Definition

1. E(X) = E(X|S)P(S) + E(X|Sc)P(Sc)

2. E(X) = E(X|S1) * P(S1) + E(X|S2) * P(S2) + ...+ E(X|Sn) * P(Sn)

 

Where: E(X) = the unconditional expected value of X

E(X|S1) = the expected value of X given Scenario 1

P(S1) = the probability of Scenario 1 occurring

The set of events {S1, S2,..., Sn} is mutually exclusive and exhaustive.

Term
Covariance (expected value)
Definition

Cov (XY) = E{[X - E(X)][Y - E(Y)]}

Cov (RA,RB) = E{[RA - E(RA)][RB - E(RB)]}

Term
Correlation Coefficient
Definition

Corr (RA,RB) = Cov (RA,RB) / [(σA)(σB)]

 

 

Term
Expected Return on a Portfolio
Definition
Sum of weight * expected return
Term
Portfolio Variance
Definition
Var(Rp) = Sum of (wi'*wj*Cov(Ri,Rj))
Term
Variance of a 2 asset portfolio
Definition
Var(Rp) = [w2a2*(Ra)] + [w2b2*(Rb)] + [2wa*wb*Cov(Ra,Rb)]
Term
Bayes' Formula
Definition
P(Event|Information) = [P(Information|Event) * P(Event)] / P(Information)
Term
Counting Ruels
Definition
The number of different ways that the k tasks can be done = n1*n2*...*nk
Term
Combinations
Definition

nCr = (n over r) = n! / [(n-r)!*(r!)]

 

Used when the order in which the items assigned the labels is not important

Term
Variance of a 3 asset portfolio
Definition
Var(Rp) = [w2a2*(Ra)] + [w2b2*(Rb)] + [w2c2*(Rc)] + [2*wa*wb*Cov(Ra,Rb)] + [2*wb*wc*Cov(Rb,Rc)] + [2*wc*wa*Cov(Rc,Ra)]
Term
Permutations
Definition
nPr = (n!) / (n-r)!
Term
Discrete uniform distribution
Definition

F(x) = n * p(x)

 

For the nth observation

Term
Binomial distribution
Definition

P(X=x) = nCx*(p)x*(1-p)n-x

 

p = probability of success

1-p = probability of failure

nCx = number of possible combinations of having x successes in n trials. Aka number of ways to choose x from n when the order does not matter

Term
Variance of a binomial random variable
Definition
σ2x = n*p*(1-p)
Term
The Continuous Uniform Distribution`
Definition
P(X b) = 0 P (x1 < X < x2) = (x- x1) / (b - a)
Term
Confidence intervals (amounts)
Definition

90% - x ± 1.65s

95% - x ± 1.96s

99% - x ± 2.58s

 

Mean ± ...

Term
Probability statements that can be made about normal distributions
Definition

Approximately 50% of all observations lie in the interval mean ± (2/3)σ

Approximately 68% of all observations lie in the interval mean ± 1σ

Approximately 95% of all observations lie in the interval mean ± 2σ

Approximately 99% of all observations lie in the interval mean ± 3σ

Term
z-Score
Definition
z = (xi-μ) / σ
Term
Roy's safety-first criterion
Definition

Minimize P(RpT)

 

Where:

Rp = portfolio return

RT = target return

Term
Shortfall ratio
Definition

(E(Rp)-Rt) / σp

 

E(Rp) = expected portfolio return

Rt = target return

Term
Continuously compounded returns
Definition

EAR = ercc - 1

 

Where:

rcc = continuously compounded annual rate

 

HPRt = e(rcc*t) - 1

Term
Sampling Error
Definition

Sampling error of the mean = Sample mean - Population mean

 

= X - μ

Term
Standard error (when population variance is known)
Definition
SE = σ / (n1/2)
Term
Standard error when population variance is not known
Definition
SE = s / (n1/2)
Term
Confidence intervals (computation)
Definition

Sample mean ± (reliability factor * standord error)

 

Reliability factor = The standard normal random variable for which the probability of an observation lying in either tail is α / 2

Term
Test Statistic
Definition
(Sample statistic-hypothesized value) / standard error of sample statistic
Term
Power of a test
Definition
1 - P(Type II Error)
Term
Type I Error
Definition
Reject hypothesis that is true
Term
Type II
Definition
Do not reject hpothesis even though it is false
Term
t-Statistic
Definition

[(X-μ0)] / [(s / n1/2)]

 

X = sample mean

μ0 = hypothesized population mean

s = standard deviation of the sample

 n = sample size

Term
Setting Price Targets with Head and Shoulders Patterns
Definition
Price target = Neckline - (Head-Neckline)
Term
Setting Price Targets for Inverse Head and Shoulders Patterns
Definition
Price target = Neckline + (Neckline-Head)
Term
Momentum or Rate of Change Oxcillator
Definition

M = (V-Vx) * 100

 

M = momentum oscillator value

V = last closing price

Vx = closing price x days ago (typically 10)

Term
Relative Strength Index
Definition

RSI = 100 - [100 / (1+RS)]

 

RS = sum of up changes for the period / sum of absolute value of down changes for the period

Term
Stochastic Oscillator
Definition

%k = 100*[(C-L14)/(H14-L14)]

 

C = last closing price

L14 = lowest price in last 14 days

H14 = highest price in last 14 days

%D (signal line) = Average of the last three %K values calculated daily

Term
Short Interest Ratio
Definition
Short Interest Ratio = Short Interest / Average daily trading volume
Term
Arms Index
Definition
Arms Index = [Number of advancing/number of declining issues] / [Volume of advancing/volume of declining issues]
Term
Own-Price Elasticity of Demand
Definition
% Change in Demand / % Change in price
Term
How is "Percent Change" calculated when dealing with Elasticity?
Definition

Change in value / Average value

 

[Ending value-beginning value] / [(ending value+beginning value) / 2]

Term
Slope of the Demand Function
Definition

Change in Demand / Change in Price

 

**Not percent

Term
Income Elasticity of Demand
Definition
% Change in quantity demanded / % change in income
Term
Cross-Price Elasticity of Demand
Definition
% Change in demand / % Change in price of substitute or complement
Term
Accounting Profit (Loss)
Definition
Total Revenue - Total Accounting Costs
Term
Economic Profit
Definition

Total Revenue - Total Economic Costs

 

Total Economic Costs aka explicit + implicit cost

Term
Normal Profit
Definition
Accounting Profit - Economic Profit
Term
Total Revenue
Definition
Price times quantity or the sum of individual units sold times their respective prices
Term
Average Revenue
Definition
Total Revenue divided by quantity
Term
Marginal Revenue
Definition
Change in total revenue divided by change in quantity
Term
Total Fixed Cost
Definition
Sum of all fixed expenses; includes all opportunity costs
Term
Total Variable Cost
Definition
Sum of all variable expenses, or per unit variable cost times quantity
Term
Total costs
Definition
Total fixed cost plus total variable cost
Term
Average Fixed Cost
Definition
Total fixed cost divided by quantity
Term
Average variable cost
Definition
Total variable cost divided by quantity
Term
Average total cost
Definition
Total cost divided by quantity
Term
Marginal Cost
Definition
Change in total cost divided by change in quantity
Term
Marginal Revenue Product of labor
Definition

MRP of labor = change in total revenue / change in quantity of labor

 

Marginal product * Product price (when a firm's in perfect competition)

Term
Profit maximization with MRP
Definition

Profits are maximized when:

 

(MRP1 / Price of input 1) = (MRPn / Price of input n)

Term
Relationship between MR and price elasticity
Definition
MR = P[1 - (1/Ep)]
Term
N-firm concentration ratio
Definition

Computes the aggregate market share of the N largest firms in the industry.

 

Ratio will equal 0 for perfect competition and 100 for a monopoly

Term
Herfindahl-Hirschman Index
Definition

Adds up the squares of the market shares of each of the largest N companies in the market.

 

Equals 1 for a monopoly.

Term
Nominal GDP
Definition

Value of goods and services included in GDP measured at current prices

 

Nominal GDP = quantity produced in Year t * Prices in Year t

Term
Real GDP
Definition

Refers to the value of goods included in GDP measured at base-year prices

 

Real GDP = Quantity produced in Year t * Base-year prices

Term
GDP Deflator
Definition

[Value of current year output at current year prices / value of current year output at base year prices] * 100

 

[Nominal GDP / Real GDP] * 100

Term
Components of GDP
Definition

GDP = C + I + G + (X - M)

 

C = consumer spending on final goods and services

I = gross private domestic investment, which includes business investment in capital goods and changes in inventory

G = government spending on final goods and services

X = exports

M = imports

Term
Expenditure Approach of GDP Calculation
Definition

GDP = consumer spending on goods and services

+ Business gross fixed investment

+ Change in inventories

+ Government spending on goods and services

+ Government gross fixed investment

+ Exports - imports

+ Statistical discrepancy

Term
Income Approach of GDP Calculation
Definition
National income + Capital consumption allowance + Statistical discrepancy
Term
National Income
Definition

Sum of incomes received by all factors of production used to generate final output

 

Employee compensation, corporate and government enterprise profits before taxes, interest income, rent and unincorporated business net income, indirect business taxes less subsidies

Term
Capital consumption allowance
Definition

Accounts for the wear and tear or depreciation that occurs in capital stock during the production process.

 

Represents the amount that must be reinvested by the company in the business to maintain current productivity levels

Term
Personal Income
Definition
National Income - Indirect business taxes - corporate income taxes - undistributed corporate profits + transfer payments
Term
Personal disposable income
Definition

Personal income - personal taxes

 

aka

 

Houseold consumption + Household saving

Term
Household saving
Definition
Personal disposable income - consumption expenditures - interest paid by consumers to businesses - personal transfer payments to foreigners
Term
Business sector saving
Definition
Undistributed corporate profits + capital consumption allowance
Term
GDP
Definition
Household consumption + total private sector saving + Net taxes
Term
Equality of expenditure and income
Definition

S = I + (G - T) + (X - M)

 

S is savings? I is investment or income?

Term
The IS Curve
Definition

Relationship between income and the Real Interest Rate

 

Disposable income = GDP - Business saving - Net taxes

 

S - I = (G - T) + (X - M)

Term
Quantity theory of money
Definition

MV = PY M/P and Md/P = kY

 

Where:

k = I/V

M = Nominal money supply

Md = Nominal money demand

Md/P is referred to as real money demand and M/P is real money supply

Term
Money market equilibrium
Definition
M/P = RMd
Term
Solow (neoclassical) growth model
Definition

Y = AF(L,K)

 

Where:

Y = aggregate output

L = quantity of labor

K = quantity of capital

A = technological knowledge or total factor productivity (TFP)

Term
Growth Accounting Equation
Definition

Growth in potential GDP = Growth in technology + WL(Growth in Labor) + WK(Growth in Capital)

 

Growth in per capital potential GDP = Growth in technology + WK(Growth in capital-labor ratio

Term
Measures of Sustainable Growth
Definition
Labor Productivity Potential GDP
Term
Labor Productivity
Definition
Real GDP / Aggregate hours
Term
Potential GDP
Definition
Aggregate hours * Labor productivity
Term
Potential GDP Growth rate
Definition
Long-term growth rate of labor force + Long-term labor productivity growth rate
Term
Unit Labor Cost
Definition

ULC = W/O

 

Where:

O = output per hour per worker

W = total labor compensation per hour per worker

Term
Required reserve ratio
Definition
Required reserve / Total Deposits
Term
Money multiplier
Definition
1 / Reserve requirement
Term
Fischer Effect
Definition

Nominal interest rate (RN) reflects the real interest rate (RR) and the expected inflation rate (∏C)

 

RN = RR + ∏C

Term
The Fiscal Multiplier
Definition

Ignoring taxes:

1/(1-MPC)

 

Assuming taxes:

1/[1 - MPC(1-t)]

Term
Balance of Payment Components
Definition

Current Account

Capital Account

Financial Account

Term
Current Account
Definition
Balance largely reflects trade in goods and services
Term
Capital Account
Definition
Blaance mainly consists of capital transfers and net sales of non-produced, non-financial assets
Term
Financial Account
Definition
Measures net capital flows based on sales and purchases of domestic and foreign financial assets
Term
Real Exchange Rate
Definition

SDC/FC * (PFC / PDC)

SDC/FC = Nominal Spot exchange rate

PFC = foreign price level (quoted in terms of the foreign currency)

PDC = Domestic price level (qutoed in terms of the domestic currency)

Term
Forward Rate
Definition

FDC/FC = (1 / SFC/DC) * [(1 + rDC) / (1 + rFC)]

 

or

 

FDC/FC = SDC/FC * [(1 + rDC) / (1 + rFC)]

Term
Forward Rate as expected future spot rate
Definition

Ft = St+1

 

[(St + 1) / S] - 1 = % change in S(DC/FC)t + 1 = (rDC - rFC) / (1 + rFC)

Term
Marshall-Lerner condition
Definition

ωXεX + ωMM - 1) > 0

 

Where:

ω= Share of exports in total trade

ω= Share of imports in total trade

ε= Price elasticity of demand for exports

ε= Price elasticity of demand for imports

Term
Cash movement prior to accounting recognition
Definition
Unearned (deferred) Revenue
Prepaid expense
Term
Cash movement after Accounting Recognition
Definition
Unbilled (accrued) Revenue
Accrued Expenses
Term
Unearned (deferred) Revenue Entries
Definition
Originating - record cash receipt and establish a liability

Adjusting - reduce the liability and recognize revenue
Term
Prepaid expense Entries
Definition
Originating Entry - record cash payment and establish an asset

Adjusting - Reduce the asset and recognize the expense
Term
Cash movement in the same period as accounting recognition
Definition
Settled transaction - no accrual entry needed
Term
Unbilled (accrued) Revenue Entries
Definition
Originating - record revenue and establish an asset

Adjusting - When billing occurs, reduce unbilled revenue and increase accounts receivable. When cash is collected, eliminate the receivable
Term
Accrued Expenses Entries
Definition
Originating - Establish a liability and record an expense

Adjusting - reduce the liability as cash is paid
Term
Basic EPS
Definition
[Net income - Preferred dividends] / Weighted average number of shares outstanding
Term
Diluted EPS
Definition
[(Net income - Preferred dividends) + Convertible preferred dividends + (Convertible debt interest * (1 - t))] / [Weighted average shares + Shares from conversion of convertible preferred shares + Shares from conversion of convertible debt + Shares issuable from stock options
Term
Comprehensive Income
Definition
Net Income + Other comprehensive income
Term
Gains and Losses on Marketable Securities: Balance sheet - Held-to-Maturity securities
Definition
Reported at cost or amortized cost
Term
Gains and Losses on Marketable Securities: Balance sheet - Available-for-sale Securities
Definition
Reported at fair value. Unrealized gains or losses due to changes in market values are reported in other comprehensive income within owners' equity
Term
Gains and Losses on Marketable Securities: Balance sheet - Trading Securities
Definition
Reported at fair value
Term
Gains and Losses on Marketable Securities: Income Statement - Held-to-Maturity Securities
Definition
Interest Income.

Realized gains and losses
Term
Gains and Losses on Marketable Securities: Income Statement - Available-for-sale Securities
Definition
Dividend Income.

Interest Income.

Realized gains and losses.
Term
Gains and Losses on Marketable Securities: Income Statement - Trading Securities
Definition
Dividend Income.

Interest Income.

Realized gains and losses.

Unrealized gains and losses due to change in market values
Term
Cash Flow from Operations: Inflows
Definition
Cash collected from customers

Interest and dividends received

Proceeds from sale of securities held for trading
Term
Cash Flow from Operations: Outflows
Definition
Cash paid to employees

Cash paid to suppliers

Cash paid for other expenses

Cash used to purchase trading securities

Interest paid

Taxes paid
Term
Cash Flow from Investment: Inflows
Definition
Sale proceeds from fixed assets

Sale proceeds from long-term invetments
Term
Cash Flow from Investment: Outflows
Definition
Purchase of fixed assets

Cash used to acquire LT investment securities
Term
Cash Flow from Financing: Inflows
Definition
Proceeds from debt issuance

Proceeds from issuance of equity instruments
Term
Cash Flow from Financing: Outflows
Definition
Repayment of LT Debt

Payments made to repurchase stock

Dividends payments
Term
Cash Flow Classification under IFRS and GAAP:

Interest and dividends recieved
Definition
IFRS - CFO or CFI
US GAAP - CFO
Term
Cash Flow Classification under IFRS and GAAP:

Interest Paid
Definition
IFRS - CFO or CFF

US GAAP - CFO
Term
Cash Flow Classification under IFRS and GAAP:

Dividends paid
Definition
IFRS - CFO or CFF

US GAAP - CFF
Term
Cash Flow Classification under IFRS and GAAP:

Dividends Received
Definition
IFRS - CFO or CFI

US GAAP - CFO
Term
Cash Flow Classification under IFRS and GAAP:

Taxes paid
Definition
IFRS - CFO, but part of the tax can be categorized as CFI or CFF if it is clear that the tax arose from investing or financing activities

US GAAP - CFO
Term
Cash Flow Classification under IFRS and GAAP:

Bank overdrafts
Definition
IFRS - Included as a part of cash equivalents

GAAP - not considered a part of cash equivalents and included in CFF
Term
CFO Presentation format under IFRS and US GAAP
Definition
IFRS - Direct or indirect. The former is preferred.

US GAAP - Direct or indirect. The former is preferred. However, if the direct method is used, a reconciliation of net income and CFO must be included
Term
Disclosures on CF Statements under IFRS
Definition
Taxes paid should be presented separately on the cash flow statement
Term
Disclosures on CF Statments under US GAAP
Definition
If taxes and interest paid are not explicitly stated on the cash flow statement, details can be provided in footnotes
Term
Free Cash Flow to the Firm
Definition

FCFF = NI + NCC + [Int * (1-t)] - FCInv - WCInv

 

FCFF = CFO + [Int * (1-t)] - FCInv

Term
Free Cash Flow to Equity
Definition
FCFE = CFO - FCInv + Net Borrowing
Term
Inventor Turnover
Definition
Cost of Goods Sold / Average Inventory
Term
Days of Inventory on Hand (DOH)
Definition
365 / Inventory Turnover
Term
Receivables Turnover
Definition
Revenue / Average Recievables
Term
Days Sales Outstanding
Definition
365 / Receivables Turnover
Term
Payables Turnover
Definition
Purchase / Average trade payables
Term
Number of Days Payables
Definition
365 / Payables Turnover
Term
Working Capital Turnover
Definition
Revenue / Average Working Capital
Term
Fixed Asset Turnover
Definition
Revenue / Average Fixed Assets
Term
Total Asset Turnover
Definition
Revenue / Average Total Assets
Term
Current Ratio
Definition
Current Assets / Current Liabilities
Term
Quick Ratio
Definition
[Cash + Short-term marketable investments + receivables] / Current liabilities
Term
Cash Ratio
Definition
[Cash + short-term marketable investments] / Current liabiliteis
Term
Defensive Interval Ratio
Definition
[Cash + short-term marketable investments + receivables] / Daily cash expenditures
Term
Cash Conversion Cycle
Definition
DSO + DOH - Number of Days Payables
Term
Debt-to-Assets Ratio
Definition
Total Debt / Total Assets
Term
Debt-to-Capital Ratio
Definition
Total Debt / [Total debt + Shareholders Equity]
Term
Debt-to-Equity Ratio
Definition
Total Det / Shareholders' Equity
Term
Financial Leverage Ratio
Definition
Average Total Assets / Average Total Equity
Term
Interest Coverage Ratio
Definition
EBIT / Interest Payments
Term
Fixed Charge Coverage Ratio
Definition
[EBIT + Lease Payments] / [Interest Payments + Lease Payments]
Term
Gross Profit Margin
Definition
Gross Profit / Revenue
Term
Operating Profit Margin
Definition
Operating Profit / Revenue
Term
Pretax Margin
Definition
EBT (Earnings before tax, but after interest) / Revenue
Term
Net Profit Margin
Definition
Net Profit / Revenue
Term
Return on Assets
Definition
Net Income / Average Total Assets
Term
Adjusted Return on Assets
Definition
[Net Income + (Interest Expense * (1-t)] / Average total assets
Term
Operating Return on Assets
Definition
Operating Income or EBIT / Average total assets
Term
Return on Total Capital
Definition
EBIT / [Short-term debt + long-term debt + equity]
Term
Return on Equity
Definition
Net Income / Average Total Equity
Term
Return on Common Equity
Definition
[Net Income - Preferred Dividends] / Average Common Equity
Term
DuPont Decomposition of ROE
Definition
Net Income / Average Shareholders' Equity
Term
2-Way DuPont Decomposition of ROE
Definition
[Net Income / Average total Assets] * [Average Total Assets / Average Shareholders' Equity]

ROA * Leverage
Term
3-Way DuPont Decomposition of ROE
Definition
[Net Income / Revenue] * [Revenue / Average total assets] * [Average total assets / average shareholders' equity]

Net Profit Margin * Asset Turnover * Leverage
Term
5-Way Dupont Decomposition
Definition
[Net Income / EBT] * [EBT / EBIT] * [EBIT / Revenue] * [Revenue / Average Total Assets] * [Average total assets / Average shareholders' equity]

Tax Burden * Interest Burden * EBIT Margin * Asset turnover * Leverage
Term
Price-to-Earnings Ratio
Definition
Price per share / Earnings per share
Term
Price to Cash Flow
Definition
Price per share / Cash flow per share
Term
Price to Sales
Definition
Price per Share / Sales per share
Term
Price to Book Value
Definition
Price per Share / Book Value per Share
Term
Cash flow per share
Definition
Cash flow from operations / average number of shares outstanding
Term
EBITDA per share
Definition
EBITDA / Average number of shares outstanding
Term
Dividends per Share
Definition
Common Dividends Declared / Weighted average number of ordinary shares
Term
Dividend Payout Ratio
Definition
Common share dividends / Net income attributable to common shares
Term
Retention Rate
Definition
1 - Dividend Payout Ratio
Term
Sustainable Growth Rate
Definition
Retention Rate * ROE
Term
LIFO vs FIFO when Prices are Rising:

COGS
Definition
LIFO - higher

FIFO - Lower
Term
LIFO vs FIFO when Prices are Rising:

Income before taxes
Definition
LIFO - lower

FIFO - Higher
Term
LIFO vs FIFO when Prices are Rising:

Income taxes
Definition
LIFO - Lower

FIFO - Higher
Term
LIFO vs FIFO when Prices are Rising:

Net Income
Definition
LIFO - Lower

FIFO - Higher
Term
LIFO vs FIFO when Prices are Rising:

Cash Flow
Definition
LIFO - Higher

FIFO - Lower
Term
LIFO vs FIFO when Prices are Rising:

EI
Definition
LIFO - Lower

FIFO - Higher
Term
LIFO vs FIFO when Prices are Rising:

Working Capital
Definition
LIFO - Lower

FIFO - Higher
Term
LIFO vs FIFO when Prices are Rising, Effect on Ratio:

Profitablility Ratios, NP and GP Margin
Definition
Numberator - Income is lower unde rLIFO b/c COGS is higher

Denominator - Sales are the same under both

Effect on Ratio - Lower under lifo
Term
LIFO vs FIFO when Prices are Rising, Effect on Ratio:

Debt to Equity
Definition
Numerator - same debt levels

Denominator - Lower equity number under LIFO

Effect on Ratio - Higher under LIFO
Term
LIFO vs FIFO when Prices are Rising, Effect on Ratio:

Current Ratio
Definition
Numerator - current assets are lower under LIFO because EI is lower

Denominator - Current liabilities are the same

Effect on Ratio - Lower under LIFO
Term
LIFO vs FIFO when Prices are Rising, Effect on Ratio:

Quick Ratio
Definition
Numerator - Assets are higher as a result of lower taxes paid

Denominator - Current liabilities are the same

Effect on ratio - Higher under LIFO
Term
LIFO vs FIFO when Prices are Rising, Effect on Ratio:

Inventory Turnover
Definition
Numerator - COGS is higher under LIFO

Denominator - Average inventory is lower under LIFO

Effect on Ratio - Higher under LIFO
Term
LIFO vs FIFO when Prices are Rising, Effect on Ratio:

Total Asset Turnover
Definition
Numerator - Sales are the same

Denominator - Lower total assets under LIFO

Effect on Ratio - Higher under LIFO
Term
Initial effect on statements when a cost is capitalized
Definition
Noncurrent assets increase

Cash flow from investing activities decreases
Term
Future period effect on statements when a cost is capitalized
Definition
The asset is depreciated or amortized:

Noncurrent assets decrease

Net Income decreases

Retained earnings decrease

Equity decreases
Term
Effect on financial statements when a cost is expensed
Definition
Net Income decreases by the entire after-tax amount of the cost

No related asset is recorded on the BS and therefore, no depreciation or amortization expense is charged in future periods

Operating cash flow decreases

Expensed costs have no financial statements impact in future years
Term
Capitalizing vs Expensing Costs:

Net Income (First Year)
Definition
Capitalizing - Higher

Expensing - Lower
Term
Capitalizing vs Expensing Costs:

Net Income (Future years)
Definition
Capitalizing - Lower

Expensing - Higher
Term
Capitalizing vs Expensing Costs:

Total Assets
Definition
Capitalizing - Higher

Expensing - Lower
Term
Capitalizing vs Expensing Costs:

Shareholders' Equity
Definition
Capitalizing - Higher

Expensing - Lower
Term
Capitalizing vs Expensing Costs:

CF Operations
Definition
Capitalizing - Higher

Expensing - Lower
Term
Capitalizing vs Expensing Costs:

CF Investing
Definition
Capitalizing - Lower

Expensing - Higher
Term
Capitalizing vs Expensing Costs:

Income Variabliity
Definition
Capitalizing - Lower

Expensing - Higher
Term
Capitalizing vs Expensing Costs:

Debt to Equity
Definition
Capitalizing - Lower

Expensing - Higher
Term
Depreciation Expense under Straight Line
Definition
[Original Cost - Salvage Value] / Depreciable Life
Term
Depreciation Expense under Accelerated
Definition
Dep in Year X = [2 / Depreciable Life] * Bok value at the beginning of Year X
Term
Estimated Useful Life
Definition
Gross Investment in Fixed Assets / Annual Depreciation Expense
Term
Average Cost of Asset
Definition
Accumulated Deprecation / Annual Depreciation Expense
Term
Remaining Useful Life
Definition
Net Investment in Fixed Assets / Annual Depreciation Expense
Term
Carrying amount greater than tax base for Asset and Liability
Definition
Asset - Results in Deferred Tax Liability

Liability - Results in Deferred Tax Asset
Term
Tax base greater than carrying amount for Asset and Liability
Definition
Asset - Results in Deferred Tax Asset

Liability - Results in Deferred Tax Liability
Term
Income Tax Accounting under IFRS vs GAAP:

Revaluation of Fixed Assets and Intangible Assets
Definition
IFRS - Recognized in equity as deferred taxes

GAAP - Revaluation is prohibited
Term
Income Tax Accounting under IFRS vs GAAP:

Treatment of undistributed profit from investment in subsidiaries
Definition
IFRS - Recognized as deferred taxes except when the company is able to control the distribution of profits and it is probable that temporary differences will not reverse in future

GAAP - No recognition of deferred taxes for foreign subsidiaries that fulfill indefinite reversal criteria. No recognition of deferred taxes for domestic subsidiaries when amounts are tax-free
Term
Income Tax Accounting under IFRS vs GAAP:

Treatment of undistributed profit from investments in joint venture
Definition
IFRS - Recognized as deferred taxes except when the investor controls the sharing of profits and it is probable that there will be no reversal of temporary differences in future

GAAP - No recognition of deferred taxes for foreign corporate joint ventures that fulfill indefinite reversal criteria
Term
Income Tax Accounting under IFRS vs GAAP:

Treatment of Undistributed Profit from Investment in Associates
Definition
IFRS - Recognized as deferred taxes except when the investor controls the sharing of profits and it is probable that there will be no reversal of temporary differences in future

GAAP - Deferred taxes are recognized from temporary differences
Term
Income Tax Accounting under IFRS vs GAAP: Deferred Tax Measurement:

Tax Rates
Definition
IFRS - Tax rates and tax laws enacted or substantively enacted

GAAP - Only enacted tax rates and tax laws are used
Term
Income Tax Accounting under IFRS vs GAAP: Deferred Tax Measurement:

Deferred tax asset recognition
Definition
IFRS - Recognized if it is probable that sufficient taxable profit will be available in the future

GAAP - Deferred tax assets are recognized in full and then reduced by a valuation allowance if it is likely that they will not be realized
Term
Income Tax Accounting under IFRS vs GAAP: Deferred Tax Presentation:

Offsetting of Deferred Tax Assets and Liabilities
Definition
IFRS - Offsetting allowed only if the entity has right to legally enforce it and the balance is related to a tax levied by the same authority

GAAP - Same as in IFRS
Term
Income Tax Accounting under IFRS vs GAAP: Deferred Tax Presentation:

Balance Sheet Classification
Definition
IFRS - Classified on balance sheet as net noncurrent with supplementary disclosures

GAAP - Classified as either current or noncurrent based on classification of underlying asset and liability
Term
Effective Tax Rate
Definition
Income tax expense / Pretax Income
Term
Income Tax Expense
Definition
Taxes Payable + Change in DTL - Change in DTA
Term
Income Statement Effects of Lease Classification:

Operating Expenses
Definition
Finance Lease - Lower

Operating Lease - Higher
Term
Income Statement Effects of Lease Classification:

Nonoperating Expenses
Definition
Finance Lease - Higher

Operating Lease - Lower
Term
Income Statement Effects of Lease Classification:

EBIT (Operating Income)
Definition
Finance Lease - Higher

Operating Lease - Lower
Term
Income Statement Effects of Lease Classification:

Total Expenses - early years
Definition
Finance Lease - Higher

Operating Lease - Lower
Term
Income Statement Effects of Lease Classification:

Total Expenses - later years
Definition
Finance Lease - Lower

Operating Lease - Higher
Term
Income Statement Effects of Lease Classification:

Net Income - early years
Definition
Finance Lease - Lower

Operating Lease - Higher
Term
Income Statement Effects of Lease Classification:

Net Income - later years
Definition
Finance Lease - Higher

Operating Lease - Lower
Term
Balance Sheet Effects of Lease Classification:

Assets
Definition
Capital Lease - Higher

Operating Lease - Lower
Term
Balance Sheet Effects of Lease Classification:

Current Labilities
Definition
Capital Lease - Higher

Operating Lease - Lower
Term
Balance Sheet Effects of Lease Classification:

Long Term Liabilities
Definition
Capital Lease - Higher

Operating Lease - Lower
Term
Balance Sheet Effects of Lease Classification:

Total Cash
Definition
Capital Lease - Same

Operating Lease - Same
Term
Cash Flow Effects of Lease Classification:

Cash Flow from Operations
Definition
Capital Lease - Higher

Operating Lease - Lower
Term
Cash Flow Effects of Lease Classification:

Cash Flow from Finance
Definition
Capital Lease - Lower

Operating Lease - Higher
Term
Cash Flow Effects of Lease Classification:

Total Cash Flow
Definition
Capital Lease - Same

Operating Lease - Same
Term
Impact of Lease Classification on Financial Ratio:

Asset Turnover
Definition
Numerator - Sales - same

Denominator - Assets - higher

Effect on Ratio - Lower

Ratio is worse under finance lease
Term
Impact of Lease Classification on Financial Ratio:

Return on Assets (in early years)
Definition
Numerator - NI lower in early years

Denominator - Assets - Higher

Effect on Ratio - Lower

Ratio is worse under finance lease
Term
Impact of Lease Classification on Financial Ratio:

Current Ratio
Definition
Numerator - Current Assets - same

Denominator - Current Liabilities - higher

Effect on Ratio - Lower

Ratio is worse under finance lease
Term
Impact of Lease Classification on Financial Ratio:

Leverage Ratios (D/E and D/A)
Definition
Numerator - Debt - Higher

Denominator - Equity - Same; Assets - Higher

Effect on Ratio - Higher

Ratio is worse under finance lease
Term
Impact of Lease Classification on Financial Ratio:

Return on Equity (in early years)
Definition
Numerator - NI lower in early years

Denominator - Equity- same

Effect on Ratio - Lower

Ratio is worse under finance lease
Term
Financial Statement Effects of Lease Classification from Lessor's Perspective:

Total Net Income
Definition
Financing Lease - Same

Operating Lease - Same
Term
Financial Statement Effects of Lease Classification from Lessor's Perspective:

Net Income (early years)
Definition
Financing Lease - Higher

Operating Lease - Lower
Term
Financial Statement Effects of Lease Classification from Lessor's Perspective:

Taxes (early years)
Definition
Financing Lease - Higher

Operating Lease - Lower
Term
Financial Statement Effects of Lease Classification from Lessor's Perspective:

Total CFO
Definition
Financing Lease - Lower

Operating Lease - Higher
Term
Financial Statement Effects of Lease Classification from Lessor's Perspective:

Total CFI
Definition
Financing Lease - Higher

Operating Lease - Lower
Term
Financial Statement Effects of Lease Classification from Lessor's Perspective:

Total CF
Definition
Financing Lease - Same

Operating Lease - Same
Term
Leverage Ratios
Definition
Debt-to-assets ratio
Debt-to-capital ratio
Debt-to-equity ratio
Financial Leverage Ratio
Term
Debt-to-assets Ratio
Definition
Expresses the percentage of total assets financed by debts

Total Debt / Total Assets
Term
Debt-to-capital Ratio
Definition
Measures the percentage of a company's total capital financed by debt

Total Debt / [Total Debt + Total Shareholders' Equity]
Term
Debt-to-equity Ratio
Definition
Measures the amount of debt financing relative to equity financing

Total Debt / Total Shareholders' Equity
Term
Financial Leverage Ratio
Definition
Measures the amount of total assets supported by one money unit of equity

Average Total Assets / Average Shareholders' Equity
Term
Coverage Ratio
Definition
Interest Coverage Ratio
Fixed Charge Coverage Ratio
Term
Interest Coverage Ratio
Definition
Measures the number of times a company's EBIT could cover its interest payments

EBIT / Interest Payments
Term
Fixed Charge Coverage Ratio
Definition
Measures the number of times a company's earnings (before interest, taxes, and lease payments) can cover the company's interest and lease payments

[EBIT + Lease payments] / [Interest Payments + Lease Payments]
Term
Adjustments Related to Inventory
Definition

EIFIFO = EILIFO + LR (aka LIFO Reserve)

 

COGSFIFO = COGSLIFO - (Change in LR during the year)

Term
Net Income Tax under FIFO will be greater than LIFO net income after tax by:
Definition
Change in LIFO Reserve * (1 - Tax Rate)
Term
When Converting from LIFO to FIFO Assuming Rising Prices:

Equity (retained earnings) change by:
Definition
Increase:

LIFO Reserve * (1 - Tax Rate)
Term
When Converting from LIFO to FIFO Assuming Rising Prices:

Liabilities (deferred taxes) change by:
Definition
Increase:

LIFO Reserve * Tax Rate
Term
When Converting from LIFO to FIFO Assuming Rising Prices:

Current Assets (inventory) change by:
Definition
Increase:

LIFO Reserve
Term
Adjustments Related to Property, Plant, and Equipment
Definition
Gross Investment in fixed assets / Annual Deprediation Expense= [Accumulated depreciation expense / Annual Depreciation expense] + [Net Investment in Fixed Assets / Annual Depreciation Expense

Estimated Useful or Depreciable Live = Average age of asset + Remaining Useful Life
Term
Categories of Marketable Securities and Accounting Treatment:

Held-to-maturity
Definition
Balance Sheet Value - Amortized cost (Par value +/- unamortized premium/discount)

Gains and Losses:
Unrealized - Not reported
Realized - Recognized on income statement

Income (Interest and Dividends) - Recognized on Income Statement
Term
Categories of Marketable Securities and Accounting Treatment:

Held-for-trading
Definition
Balance Sheet Value - Fair Value

Gains and Losses:
Unrealized - Recognized on income statement
Realized - Recognized on income Statement

Income (Interest & Dividends) - Recognized on Income statement
Term
Categories of Marketable Securities and Accounting Treatment:

Available-for-sale
Definition
Balance Sheet Value - Fair Value

Gains and Losses:
Unrealized - recognized in other comprehensive income
Realized - Recognized on Income Statment

Income (Interest & Dividends) - recognized on income statement
Term
Property Plant and Equipment:

US GAAP
Definition
Balance Sheet - Cost minus accumulated depreciation

Changes in BS Value - Does not permit upward revaluation

Effects of changes in BS Value - No effect
Term
Property Plant and Equipment:

IFRS
Definition
Balance Sheet - Cost minus accumulated Deprecation

Changes in BS Value - Permits upward revaluation. Asset is reported at fair value at the revaluation date less accumulated depreciation following the revaluation

Effects of Changes in BS Value - Increase in asset's value from revaluation is reported as a part of equity unless it is reversing a previously-recognized decrease in the value of the asset. Decrease is reported on IS unless it is a reversal
Term
Long-Term Investment Extent of Control and Accounting Treatment:

Less than 20%
Definition
Extent of Control - No significant control

Accounting Treatment - Classified as held-to-maturit, trading, or available for sale securities
Term
Long-Term Investment Extent of Control and Accounting Treatment:

20-50%
Definition
Extent of Control - Significant Influence

Accounting Treatment - Equity method
Term
Long-Term Investment Extent of Control and Accounting Treatment:

More than 50%
Definition
Extent of Control - Significant control

Accounting Treatment - Consolidation
Term
Long-Term Investment Extent of Control and Accounting Treatment:

Shared (joint ventures)
Definition
Extent of Control - Joint control

Accounting Treatment - Equity method/proportionate consolidation
Term
Treatment of Identifiable Intangible Assets:

GAAP
Definition
BS - Only purchased may be recognized as assets. Developed cannot. Reported at cost - accumulated amort for assets with finite useful lives, cost - impairment for assets with infinite useful lives

Changes in BS Value - Does not purmit upward revaluation

Effects of Changes in BS Value - No effect
Term
Treatment of Identifiable Intangible Assets:

IFRS
Definition
BS - Only purchsed may be recognized as assets, internally developed may not. Finite useful lives - reported at cost - accum amort. Infinite useful lives - reported at cost - impairment

Changes in BS Value - Permits upward revaluation. Reported at fair value as of reval date less subsequent accum amort.

Effects of Changes in BS Value - Increase - part of equity (unless a reversal) Decrease - on IS unless it is a reversal
Term
Long-Term Contracts:

GAAP
Definition
Outcome can be reliably estimated - percentage-of-completion method

Outcome cannot be reliably estimated - completed contract method
Term
Long-Term Contracts:

IFRS
Definition
Outcome can be reliably estimated - percentage-of-completion method

Outcome cannot be reliably estimated - revenue is recognized to the extent that is is probable to recover contract costs. Profit is only recognized at project completion
Term
Net Present Value
Definition

Sum of discounted cash flows - Initial Cash Outlay

 

∑[CF/ (1 + r)t] - Outlay

Term
Internal Rate of Return
Definition

Discount rate that equates the cash flows with the initial cash outlay

 

∑[CFt / (1 + IRR)t] = Outlay

Term
Average Accounting Rate of Return (AAR)
Definition
Average Net Income / Average Book Value
Term
Profitability Index
Definition
PV of Future Cash flows / Initial Investment or 1 + [NPV / Initial Investment]
Term
Weighted Average Cost of Capital
Definition

WACC = [(wd)(rd)(1 - t)] + [(wp)(rp)] + [(wc)(rc)]

 

p = preferred stock

c = common equity

d = debt

Term
Transforming Debt-to-Equity Ratio into a components weight
Definition
[D/E] / [1 + (D/E)] = D / [D + E] = wd
Term
Bond Valuation
Definition
Sum of PV of Payments + PV of Principal repayments
Term
Valuation of Preferred Stock
Definition

vp = Dp/rp

 

v = value

D = dividend

r = cost of preferred stock

Term
Measures of Required Return on a Stock
Definition

CAPM

Dividend Discount Model

Term
Capital Asset Pricing Model
Definition
rc = Rf + B[E(RM) - RF]
Term
Dividend Discount Model
Definition

P0 = D1 / [rc - g]

 

g = expected constant growth rate of dividends

rc = required rate of return on common equity

 

Rearranges to: rc = [D1 / P0] + g

Term
Sustainable Growth Rate
Definition

g = [1 - (D/EPS)] * ROE [

 

1 - (D/EPS)] aka Earnings Retention Rate (1 - div payout ratio)

Term
Bond Yield Plus risk premium approach
Definition
rc = rd + risk premium
Term
To Unlever the Beta
Definition
βAsset = βEquity * [1 / (1 + (1-t)*(D/E))]
Term
To Lever the Beta
Definition
βProject = βAsset * [1 + ((1-t)*(D/E))]
Term
Country Risk Premium
Definition

rc = Rf + β[E(RM) - RF + CRP]

 

or

 

Sovereign yield spread * (Annualized SD of equity index / Annualized SD of Sovereign bond market in terms of the developed market currency)

Term
Break Point
Definition
Amount of capital at which a component's cost of capital changes / proportion of new capital raised from the component
Term
Degree of Operating Leverage
Definition
DOL = Percent Change in Operating Income / Percent change in units sold
Term
Degree of Operating Leverage Formula
Definition
[Q * (P - V)] / [(Q * (P - V)) - F]

Q = number of units sold
P = Price per unit
V = Variable operating cost per unit
F = Fixed operating cost
Q * (P - V) = Contribution Margin (amount that units sold contribute to covering fixed costs
Term
Degree of Financial Leverage
Definition
DFL = Percentage Change in Net Income / Percentage Change in Operating Income
Term
Degree of Financial Leverage Formula
Definition
DFL = [Q(P - V) - F] / [Q(P - V) - F - C]

Q = number of units sold
P = Price per unit
V = Variable operating cost per unit
F = Fixed operating cost
C = Fixed financial cost
Term
Degree of Total Leverage
Definition
Percentage Change in Net Income / Percentage Change in the Number of Units Sold
Term
Degree of Total Leverage Formula
Definition
DTL = DOL * DFL

DTL = [Q * (P - V)] / [Q * (P - V) - F - C]
Term
Break Point Formula
Definition

PQ = VQ + F + C

 

P = Price per unit

Q = Number of units produced and sold

V = Variable cost per unit

F = Fixed operating costs

C = Fixed financial costs

 

QBE = (F + C) / (P - V)

Term
Operating Break Even Point
Definition

PQOBE = PV + F

 

QOBE = F / (P - V)

P = Price per unit

Q = Number of units produced and sold

V = Variable cost per unit

F = Fixed operating costs

Term
Current Ratio (CorpFin)
Definition
Current Assets / Current Liabilities
Term
Quick Ratio (CorpFin)
Definition
(Cash + Short term marketable investments + receivables) / Current Liabilities
Term
Accounts Receivable Turnover (CorpFin)
Definition
Credit Sales / Average Recievables
Term
Number of Days of Receivables (CorpFin)
Definition
Accounts Receivable / Average Days Sales on credit

Accounts Receivable / [Sales on Credit / 365]
Term
Inventory Turnover (CorpFin)
Definition
Cost of Goods Sold / Average Inventory
Term
Number of Days of Inventory (CorpFin)
Definition
Inventory / Average day's COGS

Inventory / [COGS / 365]
Term
Payables Turnover (CorpFin)
Definition
Purchases / Average Trade Payables
Term
Number of Days of Payables (CorpFin)
Definition
Accounts payables / Average day's purchases

Accounts payables / [Purchases / 365]
Term
Purchases (CorpFin)
Definition
Ending Inventory + COGS - Ending Inventory
Term
Operating Cycle (CorpFin)
Definition
Number of Days of Inventory + Number of Days of recievables

[Inventory / [COGS / 365]] + [Accounts Receivable / [Sales on Credit / 365]]
Term
Net Operating Cycle (CorpFin)
Definition
Number of days of inventory + number of days of receivables - number of days of payables
Term
Money Market Yield (CorpFin)
Definition
[(Face value - price) / Price] * [360 / Days]

HPY * [360 / Days]
Term
Bond Equivalent Yield (CorpFin)
Definition
[(Face value - price) / Price] * (365/Days)

HPY * (365/Days)
Term
Discount Basis Yield (CorpFin)
Definition
[(Face value - price) / Face Value] * (360/Days)

% Discount * (360/Days)
Term
% Discount (CorpFin)
Definition
[Face value - price] / Price
Term
Inventory Turnover (CorpFin)
Definition
COGS / Average Inventory
Term
Cost of Trade Credit (aka Implicit Rate)
Definition

[1 + (Discount / (1 - Discount))][365 / Days beyond discount period] - 1

 

Not sure if -1 is raised up or not

Term
Line of Credit Cost
Definition
(Interest + Commitment fee) / Loan amount
Term
Banker's Acceptance Cost
Definition
Interest / Net proceeds

Interests / (Loan amount - Interest)
Term
Holding Period Return
Definition

R = [(PT + DT) / P0] - 1

 

PT = Price at end

DT = Dividends paid

P0 = Price at the beginning of the period

Term
Holding Period return - multiple periods
Definition

R = [(1 + R1)*(1 + R2)*...*(1 + RN)] - 1

 

Rs are sub-period returns

 

**Return for WHOLE period

Term
Geometric Mean Return
Definition

R = [[(1 + R1)*(1 + R2)*...*(1 + RN)](1/n)] - 1

 

**ANNUAL return

Term
Annualized Return
Definition

rannual = [(1 + rperiod)n] - 1

 

r = Return on Investment

n = Number of periods in a year

Term
Portfolio Return
Definition

Rp = w1R1 + w2R2

 

w = Weight of asset

R = Return on asset

Term
Variance of a Single Asset
Definition

σ2 = [Σ(Rt - μ)2] / T

 

Rt = Return for period t

T = total number of period

u = Mean of T returns

Term
Variance of a Representative Sample of the Population
Definition

σ2 = [Σ(Rt - R)2] / [T - 1]

 

R = mean return of the sample observations

σ2 = sample variance

Term
Standard deviation of an asset
Definition

σ = [[∑(Rt - μ)2] / T]1/2

 

For a sample, denominator is T - 1

Term
Variance of a Portfolio of Assets
Definition

σp2 = ∑wiwjCov(Ri,Rj)

 

or

 

σp2 = Σwi2Var(Ri) + ΣwiwjCov(Ri,Rj)

Term
Standard deviation of a portfolio of Two Risky Assets
Definition

σp = [w12σ12 + w22σ22 + 2w1w2σ1σ2ρ1,2]1/2

 

or

 

[w12σ12 + w22σ22 + 2w1w2Cov1,2]1/2

Term
Utilit Function
Definition

U = E(R) - (1/2)Aσ2

 

Where:

 

U = utility of an investment

E(R) = Expected Return

σ2 = Variance of Returns

A = Additional return required by the investor to accept an additional unit of risk

Term
Capital Allocation Line
Definition

[E(Ri) - Rf] / σi

 

CAL has intercept of Rf and a constant slope given by the above formula

Term
Expected Return on Portfolios that lie on CML
Definition

E(Rp) = w1Rf + (1-w1)E(Rm)

 

w1 = Weight in risk free asset

E(Rm) = expected market return

Term
Variance of portfolios that lie on CML
Definition
σ2 = [w12σ2f + (1-w1)2σ2m + 2w1(1-w1)Cov(Rf,Rm)]1/2
Term
Equation of CML
Definition

E(Rp) = Rf + [(E(Rm) - Rf)/σm] * σp

 

Slope ((E(Rm) - Rf)/σm) is the market price of risk

Term
Total Risk
Definition
Systematic + Unsystematic Risk
Term
Return-Generating Models
Definition
E(Ri) - Rf = βi1[E(Rm) - Rf] + ΣβijE(Fj)
Term
The Market Model
Definition
Ri = αi + βiRm +ei
Term
Calculation of Beta
Definition
βi = Cov(Ri,Rm) / σ2m = [ρi,mσiσm] / σ2m = ρi,mσi / σm
Term
Capital Asset Pricing Model
Definition
E(Ri) = Rf + βi[E(Rm) - Rf]
Term
Sharpe Ratio
Definition
[Rp - Rf] / σp
Term
Treynor Ratio
Definition

[Rp - Rf] / βp

 

Term
M-Squared
Definition
[Rp - Rf]*[σmp] - (Rm - Rf)
Term
Jensen's Alpha
Definition
αp = Rp - [Rf + βp(Rm - Rf)]
Term
Security Characteristic Line
Definition
Ri - Rf = αi + βi(Rm - Rf)
Term
Calculating a Margin Call
Definition

P0 * [(1-Initial Margin) / (1-Maintenance Margin)]

 

Gives price at which an investor who goes long on a stock recieves a margin call

Term
Value of a Price Return Index
Definition

VPRI = ΣniPi / D

 

VPRI = Value of the price return index

ni = Number of units of constituent security i held in the index portfolio

Pi = Unit price of constituent security i

D = Value of the divisor

Term
Price Return of an Index
Definition

PRI = [VPRI1-VPRI0] / VPRI0

 

PRI = Price return of the index portfolio (as a decimal)

VPRI1= Value of the price return index at the end of the period

VPRI0 = Value of the price return index at the beginning of the period

 

 

Term
Price Return of Each Constituent Security of an Index
Definition

PR= [Pi1-Pi0] / Pi0 

 

where:

PRi = Price return of constituent security i (as a decimal number)

Pi1 = Price of the constituent security i at the end of the period

Pi0 = Price of the constituent security i at the beginning of the period

 

 

Term
Price Return of the Index is calculated as:
Definition

Weighted average price return of the constituent securities:

PRI = w1PR1 + w2PR2 + ....+ wNPRN

 

where:

PRI = Price return of the index portfolio (as a decimal number)

PRi = Price return of constituent security i (as a decimal number)

wi = Weight of security i in the index portfolio

N = Number of securities in the index

Term
Total Return of an Index
Definition

TRI = [VPRI1-VPRI0+IncI] / VPRI0

 

where:

TRI = Total return of the index portfolio (as a decimal number)

VPRI1 = Value of the total return index at the end of the period

VPRI0 = Value of the total return index at the beginning of the period

IncI = Total income from all securities in the index held over the period

 

 

 

Term
Total Return of Each Constituent Security of an Index
Definition

TR= [P1i-P0i+Inci] / P0i

 

where:

TRi = Total return of constituent security i (as a decimal number)

P1i = Price of constituent security i at the end of the period

P0i = Price of constituent security i at the beginning of the period

Inci = Total income from security i over the period

Term
Total Return of the Index is Calculated as: (Total Return formula)
Definition

TRI = w1TR1 + w2TR2 +....+ wNTRN

 

where:

TRI = Total return of the index portfolio (as a decimal number)

TRi = Total return of constituent security i (as a decimal number)

wi = Weight of security i in the index portfolio

N = Number of securities in the index

Term
Calculation of Index Returns Over Multiple Time Periods
Definition

VPRIT= VPRI0(1+PRI1)(1+PRI2) ... (1+PRIT)

 

where:

VPRI0 = Value of the price return index at inception

VPRIT = Value of the price return index at time t

PRIT = Price return (as a decimal number) on the index over the period

 

Can be valued the same way using values of a Total Return Index

Term
Price Weighting
Definition
wiP = Pi / ΣPi
Term
Equal Weighting
Definition

wiE = 1 / N

 

where:

wi = Fraction of the portfolio that is allocated to security i or weight of security i

N = Number of securities in the index

Term
Market Cap Weighting
Definition

wiM = QiPi / ΣQjPj

 

where:

wi = Fraction of the portfolio that is allocated to security i or weight of security i

Qi = Number of shares outstanding of security i

Pi = Share price of security i

N = Number of securities in the index

Term
Float-Adjusted Market-Cap Weight of Each Constituent Security:
Definition

wiM = fiQiPi / ΣfjQjPj

 

where:

fi = Fraction of shares outstanding in the market float

wi = Fraction of the portfolio that is allocated to security i or weight of security i

Qi = Number of shares outstanding of security i

Pi = Share price of security i

N = Number of securities in the index

Term
Fundamental Weighting
Definition

wiF = Fi / ΣFj

 

where:

Fi = A given fundamental size measure of company i

Term
Return Characteristics of Equity Securities
Definition

Total Return, Rt = (Pt–Pt-1+Dt) / Pt-1

 

where:

Pt-1 = Purchase price at time t – 1

Pt = Selling price at time t

Dt = Dividends paid by the company during the period

Term
Accounting Return on Equity
Definition

ROEt = NIt / Average BVEt = NIt / [(BVEt+BVEt-1) / 2]

 

Net Income / Avg Book value of equity

Term
Dividend Discount Model
Definition
Value = ΣDt / (1+ke)t
Term
Dividend Discount Model One Year Holding Period
Definition
[Dividend to be recieved + year-end price] / (1 +ke)1
Term
Multiple-Year Holding Period DDM
Definition
v = [D1 / (1+ke)1] + [D2 / (1+ke)2] + ... + [Pn / (1+ke)n]
Term
Infinite Period DDM
Definition
PV = D1 / [ke-gc]
Term
Long-term constant growth rate
Definition

gc = RR * ROE

 

**What's RR?? Retention Rate?

Term
Multi-Stage Dividend Discount Model
Definition

Value = [D1 / (1+ke)1] + [D2 / (1+ke)2] +...+ [Dn / (1+ke)n] + [Pn / (1+ke)n]

 

Where:

Pn = D(n+1) / [ke-gc]

Dn = Last dividend of the supernormal growth period

Dn+1 = First dividend of the constant growth period

Term
Free Cash Flow to Equity Model
Definition

V0 = ΣFCFEt / (1+ke)t

 

FCFE = CFO - FC Inv + Net Borrowing

 

Intrinsic value of the company's stock by discounting projections of FCFE at the required rate of return on equity

Term
Value of a Preferred Stock
Definition

Non-callable, non-convertible, no maturity date, and pays fixed dividends:

V0 = D0 / r

 

Non-callable, non-convertible, preferred stock with maturity at time n:

V0 = ΣDt / (1+r)t + [F / (1+r)n]

where:

V0 = value of preferred stock today (t = 0)

D= expected dividend in year t, assumed to be paid at the end of the year

r = required rate of return on the stock

F = par value of preferred stock

Term
Price to Cash Flow Ratio
Definition
Market Price of Share / Cash Flow per Share
Term
Price to Sales Ratio
Definition

Market Price per Share / Net Sales per Share

 

or:

 

Market value of equity / Total Net Sales

Term
Price to Book Value
Definition

Current Market Price of Share / Book Value per Share

 

Market Value of Common Shareholders' Equity / Book Value of Common Shareholders' Equity

 

where:

Book value of common shareholders’ equity = (Total assets - Total liabilities) - Preferred stock

Term
Price Multiples
Definition

Price to CF

Price to Sales

Price to Book

Term
Enterprise Value Multiples
Definition
EV / EBITDA
Term
EV / EBITDA
Definition

EV = Enterprise value:

 

MV of common stock

+ MV of outstanding preferred stock

+ MV of Debt

- Cash and cash equivalents

Term
Bond Coupon
Definition
Coupon Rate * Par Value
Term
Coupon Rate (Floating)
Definition
Reference rate + Quoted margin
Term
Coupon Rate (Inverse Floaters)
Definition
K - [L * Reference Rate)
Term
Callable Bond Price
Definition
Value of option-free bond - value of embedded call option
Term
Putable Bond Price
Definition
Value of Option-free bond + value of embedded put option
Term
Dollar Duration
Definition
Duration * Bond value
Term
Inflation-Indexed Treasury Securities
Definition
TIPS Coupon = Inflation-adjusted par value * (Stated coupon rate/2)
Term
Nominal Spread
Definition

Yield on Bond X - Yield on Bond Y

 

Bond Y is the reference bond

Term
Relative Yield Spread
Definition

[Yield on Bond X-Yield on Bond Y] / Yield on Bond y

 

Bond Y is the reference bond

Term
Yield Ratio
Definition
Yield on Bond X / Yield on Bond Y
Term
After-Tax Yield
Definition
Pretax Yield * (1-Marginal Tax Rate)
Term
Taxable-Equivalent Yield
Definition
Tax Exempt Yield / (1-Marginal Tax Rate)
Term
Bond Value
Definition

Maturity Value / (1+i)Years til maturity*2

 

i = semi-annual discount rate

Term
Valuing a Bond Between Coupon Payments
Definition

w = Days between settlement date and next coupon payment date / days in coupon period

 

PVt = Expected Cash Flow / (1+i)t-1+w

Term
Current Yield
Definition
Annual Cash Coupon / Bond Price
Term
Bond Price
Definition
Sum of PV Coupon Payments + Maturity Payment
Term
Formula to Convert BEY into Annual-Pay YTM
Definition
Annual-Pay Yield = [(1+(BEY/2))2 - 1]
Term
Formula to Convert Monthly Cash Flow Yield into BEY
Definition
BEY = [(1+monthly CFY)6-1] * 2
Term
Discount Basis Yield
Definition
d = (1 - p) * [360 / N]
Term
Z-Spread
Definition

OAS + Option cost

 

OAS = Z-Spread - Option Cost

 

**Don't know what either of these are

Term
Duration
Definition

[V--V+] / [2*V0(Δy)

 

where:

Δy = change in yield in decimal

V0 = initial price

V- = price if yields decline by Δy 

V+ = price if yields increase by Δy 

Term
Portfolio Duration
Definition

Portfolio duration = w1D1 + w2D2 +...+ wNDN

 

where:

N = Number of bonds in portfolio.

Di = Duration of Bond i.

wi = Market value of Bond i divided by the market value of portfolio

Term
Percentage Change in Bond Price
Definition

= duration effect + convexity adjustment

= {[-duration * (Δy)] + [convexity * (Δy)2]} * 100

 

where: Δy = Change in yields in decimals

Term
Convexty
Definition
C = [V++V--2V0] / [2V0(Δy)2]
Term
Price Balue of a Basis Point
Definition
Duration * .0001 * Bond Value
Term
Floating Rate Agreement Payoff
Definition
[Floating rate at expiration–FRA rate*(days in floating rate/360)] / [1+[Floating rate at expiration*(days in floating rate/360)]
Term
Numerator in FRA Payoff formula
Definition

Interest savings on the hypothetical loan

 

Positive when the floating rate is greater than the forward rate - Long benefits and recieves payment from the short

 

Negative when the floating rate is lower than the forward rate - Short benefits and expects to receive a payment from the long

Term
Denominator in FRA Payoff formula
Definition
Discount factor for calculating the present value of the interest savings
Term
Call Option Holder Payoffs
Definition

Choice to buy underlying asset for X

 

ST > X - Option holder will exercise; payoff of (ST - X)

ST < X - Option holder does not exercise; payoff of 0

Term
Call Option Writer Payofs
Definition

obligation to sell underlying asset for X

 

ST > X - option holder exercises the option, -(ST - X)

ST < X - Option holder oes not exercise, payoff of 0

Term
Intrinsic Value of a Call Option
Definition
Max [ 0, (ST - X)
Term
Put Option Holder Payoffs
Definition

Choice to sell the underlying asset for X

 

ST < X - holder exercises; payoff of X - ST

ST > X - option holder does not exercise; payoff of 0

Term
Put Option Writer Payoffs
Definition

Obligation to buy the underlying asset for X

 

ST < X - holder exercises; payoff of -(X - ST)

ST > X - Option holder does not exercise; payoff of 0

Term
Moneyness of a Put Option
Definition

In the Money: ST < X

 

At the Money: ST = X

 

Out of the Money: ST > X

Term
Intrinsic Value of a Put Option
Definition

ST < X: X - ST

ST = X: 0

ST > X: 0

Term
Option Premium
Definition
Intrinsic Value + Time Value
Term
Put-Call Parity
Definition
C0 + [X / (1+RF)T] = P0 + S0
Term
Synthetic Derivative Securities
Definition

Fiduciary call

Long call

Long put

Long underlying asset

Long Bond

Protective Put

Synthetic call

Synthetic Put

Synthetic Underlying Asset

Synthetic Bond

Term
Fiduciary Call, Consists of & Value
Definition

Consists of: Long call + Long Bond

 

Value: C0 + [X / (1+RF)T]

Term
Fiduciary Call Equals Strategy
Definition
Protective Put
Term
Long Call, Consists of & Value
Definition

Consists of: Long call

Value: C0

Term
Long Call Equals Strategy
Definition
Synthetic Call
Term
Long Put, Consists of & Value
Definition

Consists of: Long Put

Value: P0

Term
Long Put Equals Strategy
Definition
Synthetic Put
Term
Long Underlying Asset, Consists of & Value
Definition

Consists of: Long underlying asset

 

Value: S0

Term
Long Underlying Asset Equals Strategy
Definition
Synthetic Underlying Asset
Term
Long Bond, Consists of & Value
Definition

Consists of: Long Bond

 

Value: X / (1+RF)T

Term
Long Bond Equals Strategy
Definition
Synthetic Bond
Term
Protective Put, Consists of & Value
Definition

Consists of: Long put + Long underlying asset

 

Value: P0 + S0

Term
Protective Put Equals Strategy
Definition
Fiduciary Call
Term
Synthetic Call, Consists of & Value
Definition

Consists of: long put + long underlying asset + short bond

Value: P0 + S0 - [X / (1+RF)T]

Term
Synthetic Call Strategy Equals
Definition
Long Call
Term
Synthetic Put, Consists of & Value
Definition

Consists of: Long call + Short underlying asset + Long Bond

Value: C0 - S0 + [X / (1+RF)T]

Term
Synthetic Put Strategy Equals
Definition
Long Put
Term
Synthetic Underlying Asset, Consists of & Value
Definition

Consists Of: Long call + long bond + short put

 

Value: C0 + [X / (1+RF)T] - P0

Term
Synthetic Underlying Asset Strategy Equals
Definition
Long Underlying Asset
Term
Synthetic Bond, Consists of & Value
Definition

Consists of: Long Put + Long underling Asset + Short Call

 

Value: P0 + S0 - C0

Term
Synthetic Bond Strategy Equals
Definition
Long Bond
Term
European Call Option Value Limits
Definition

Minimum: ECT ≥ 0

 

Maximum: ECT ≤ ST

Term
American Call Option Value Limits
Definition

Minimum: ACT ≥ 0

 

Maximum: ACT ≤ ST

Term
European Put Option Value Limits
Definition

Minimum: EPT ≥ 0

 

Maximum: EPT ≤ [X / (1+RFR)T

Term
American Put Option Value Limits
Definition

Minimum: APT ≥ 0

 

Maximum: APT ≤ X

Term
European Call Option Value Bounds
Definition

Minimum: Max [0, ST - [X / (1+RFR)T]

 

Maximum: ST

Term
American Call Option Value Bounds
Definition

Minimum: Max [0, ST - [X / (1+RFR)T]

 

Maximum: ST

Term
European Put Option Value Bounds
Definition

Minimum: Max [0, [X / (1+RFR)T] - ST]

 

Maximum: X / (1+RFR)T

Term
American Put Option Value Bounds
Definition

Minimum: Max [0, X - ST]

 

Maximum: X

Term
Interest Rate Call Holder's Payof
Definition

Max (0, Underlying rate at expiration - Exercise Rate) * [(Days in underlying rate*NP) / 360]

 

where:

NP = Notional Principal

Term
Interest Rate Put Holder's Payoff
Definition

Max (0, Exercise rate - Underlying Rate at Expiration) * [(Days in underlying rate*NP) / 360]

 

where:

NP = Notional Principal

Term
Net Payment for a Fixed-Rate-Payer
Definition

(Swap fixed rate - LIBORt-1 ) * (No. of days/360) * (NP)

 

where:

NP = Notional Principal

Term
Covered Call
Definition

Value at expiration: VT = S- max(0, ST- X)

Profit: Π = V- S0 + C0

Maximum profit = X - S0 + C0

Maximum loss = S0- C0

Breakeven: ST* = S0- C0

Term
Protective Put
Definition

Value at expiration: VT = ST + max(0,X - ST)

Profit: Π = VT - S0- P0

Maximum profit = ∞

Maximum loss = S0 + P0- X

Breakeven: ST* = S0 + P0

Supporting users have an ad free experience!