finance

DIVIDEND/NET INCOME

1-payout

ROE*(1-b) or ROE*Plowback

NET INCOME/# SHARES OUTSTANDING

((PRICE-VC)Q)/((PRICE-VS)Q-FC-I)

total fixed costs/unit contribution margin

(sales price-variable cost)/sales price

PS dividend/PS price

payout ratio

div

• dividend at the end of the period
• d0*(1+g)
• recently paid (1+growth rate)

required return on common stock

constant annual growth rate

d1/(kcs-g)

Hybrid security: common stock and debt

• 1) It’s like common stock: no fixed maturity.
• Technically, it’s part of equity capital.

• 2) It’s like debt: preferred dividends are fixed.
• Missing a preferred dividend does not constitute default, but preferred dividends are usually cumulative.

• non voting and non participating
• liquidates after debt before common stock
• dividends fixed (% of par)
• dividend/requried return

• Variability or uncertainty associated with operating income (i.e. EBIT).
• Note: Specific industry influences business risk.

• Risk of distress or bankruptcy due to the use of fixed cost financing.
• Note: Management influences the financial risk with VC vs. FC decisions

Total FC/unit contribution margin

With high operating leverage, a small increase in sales produces a relatively larger increase in operating income

a 1% increase in sales will result in a DOL increase in operating income(EBIT)

• sales-vc/EBIT
• or
• q*(p-v)/
• q*(p-v)-F

by using fixed cost financing (i.e. debt or preferred stock), a small change in operating income is magnified into a larger change in earnings per share.

a 1% increase in operatin gincome (EBIT) results in a DFL increase in EPS (earnigns per share)

• Ebit/ebit-1
• or
• Q(p-v)-f/Q(P-v)-F-I

by using operating leverage and financial leverage, a small change in sales is magnified into a larger change in earnings per share.

a 1% increase in sales results in a DCL increase in EPS

• Sales-VC/EBIT-I
• or
• Q(P-v)/Q(P-V)-F-I
• Dol top/dfl bottom

(variance, standard deviation, beta

diversificiation

security market line, CAPM

measure or despersion of possible outcomes

• P(k1)*K1 + p(k2)*k2) +...
• p=probabiliy
• k=expected return

• sum P--firmER (^K) * K
• P-expected return of firm * k (expect return)

square root of variance

• “perfect positive correlation”
• Variables move in perfect tandem

• perfect negative correlation”
• Variables move in exactly opposite directions

The LOWER the correlation among assets in a portfolio (i.e. closer to -1) the GREATER the risk reduction possibilities for the portfolio.

is also called non-diversifiable risk. This risk cannot be diversified away

is also called diversifiable risk. This risk can be reduced through diversification.

overpriced.

underpriced

Km-Kf

Kj= Krf + Bj*(Km-Kf)

required return on security j

risk-free rate of interest

beta of security j

return on market index

• debt: bonds, ST/LT bank loans
• preferrd stock: hybrid debt & equity
• Equity: common stock

• bond yield
• equity risk premium

bond yield, equity risk premium, micro cap risk premium

• bond yield
• equity risk premium
• micro cap risk premium
• liquidy (start up risk premium)