1. Dividend Payout ratio
  2. plowback
  3. Sustainable Growth Rate (g*)
    ROE*(1-b) or ROE*Plowback
  6. break even
    total fixed costs/unit contribution margin
  7. contribution margin
    (sales price-variable cost)/sales price
  8. Cost of Perferred Stock
    PS dividend/PS price
  9. b
    payout ratio
  10. payout ratio
  11. D1
    • dividend at the end of the period
    • d0*(1+g)
    • recently paid (1+growth rate)
  12. Kcs
    required return on common stock
  13. g
    constant annual growth rate
  14. gordon growth model
  15. preferred stock
    Hybrid security: common stock and debt
  16. hybrid security
    • 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.
  17. Preferred stock
    • non voting and non participating
    • liquidates after debt before common stock
    • dividends fixed (% of par)
    • dividend/requried return
  18. Business (operating) risk
    • Variability or uncertainty associated with operating income (i.e. EBIT).
    • Note: Specific industry influences business risk.
  19. financial 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
  20. Break even formula
    Total FC/unit contribution margin
  21. operating leverage
    With high operating leverage, a small increase in sales produces a relatively larger increase in operating income
  22. DOL
    a 1% increase in sales will result in a DOL increase in operating income(EBIT)
  23. DOL
    • sales-vc/EBIT
    • or
    • q*(p-v)/
    • q*(p-v)-F
  24. Financial leverage
    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.
  25. DFL
    a 1% increase in operatin gincome (EBIT) results in a DFL increase in EPS (earnigns per share)
  26. DFL Equation
    • Ebit/ebit-1
    • or
    • Q(p-v)-f/Q(P-v)-F-I
  27. Combined Leverage
    by using operating leverage and financial leverage, a small change in sales is magnified into a larger change in earnings per share.
  28. DCL
    a 1% increase in sales results in a DCL increase in EPS
  29. DCL equation
    • Sales-VC/EBIT-I
    • or
    • Q(P-v)/Q(P-V)-F-I
    • Dol top/dfl bottom
  30. how to measure risk
    (variance, standard deviation, beta
  31. How to reduce risk
  32. How to price risk
    security market line, CAPM
  33. standard deviation
    measure or despersion of possible outcomes
  34. expected return
    • P(k1)*K1 + p(k2)*k2) +...
    • p=probabiliy
    • k=expected return
  35. variance
    • sum P--firmER (^K) * K
    • P-expected return of firm * k (expect return)
  36. standard deviation
    square root of variance
  37. Correlation of 1
    • “perfect positive correlation”
    • Variables move in perfect tandem
  38. Correlation -1
    • perfect negative correlation”
    • Variables move in exactly opposite directions
  39. The _______ the correlation among assets in a portfolio (i.e. closer to -1) the _______ the risk reduction possibilities for the portfolio.
    The LOWER the correlation among assets in a portfolio (i.e. closer to -1) the GREATER the risk reduction possibilities for the portfolio.
  40. Market risk/systematic risk
    is also called non-diversifiable risk. This risk cannot be diversified away
  41. Firm Specific (i.e. Nonsystematic or Idiosyncratic) Risk
    is also called diversifiable risk. This risk can be reduced through diversification.
  42. If a security is below the SML, it is
  43. If a security is above the SML, it is
  44. market risk premium
  45. CAPM Equation
    Kj= Krf + Bj*(Km-Kf)
  46. Kj
    required return on security j
  47. Krf
    risk-free rate of interest
  48. Bj
    beta of security j
  49. Km
    return on market index
  50. three sources of capital
    • debt: bonds, ST/LT bank loans
    • preferrd stock: hybrid debt & equity
    • Equity: common stock
  51. Base equity rate
    • bond yield
    • equity risk premium
  52. Micro cap equity rate
    bond yield, equity risk premium, micro cap risk premium
  53. start up firm equity rate
    • bond yield
    • equity risk premium
    • micro cap risk premium
    • liquidy (start up risk premium)
Card Set
busm 201