
Operating Activities
The principal revenue producing activities of the entity and other activities that are not investing or financing

Investing Activities
The acquistion and/or disposal of long term assets and other investments not included in cash equivalents

Financing Activities
Cash Flows relating to changes in the size and/or composition of the financial structure of the entity including equity and borrowings.

Formula: After Tax Cash Flows

Formula: Cash Collections from Customers
Sales + Op acc receivable  close acc reivable  bad debts  provision for DD  discount allowed

Formula: Cash paid to suppliers
COGS +closing inventoryopening inventory + opening acc payable  closing acc payable

Formula: Cash paid for other operating expenses
=Other operating expenses  non cash expenses  opening prepaid expenses + closed prepaid expenses +opening accrued expenses  closing accrued expenses

Formula: Cash paid for interest
= Interest expense + op accrued interest  close accrued interest

Formula: Cash paid for Tax
= Tax expense +op tax payable  close tax payable +op deferred tax  close deferred tax

Risk represents....
Return represents.....
 The return earned on investments represents the marginal benefit of investing.
 Risk represents the marginal cost of investing

Definition: Nominal Returns
Actual rate paid or earner before deducting the effects of inflation

Definition: Real Returns
The nominal rate adjusted for the effect of inflation

Definition: Effective Return
The nominal rate adjusted for the effect of the rate paid or earned being calculated more frequently than once per annum (adjusted to represent effects of compounding)

Definition: Expected Returns
The return that an investor expects to earn or receive on an asset given its price, growth, potential etc

Definition: Required Return
The return that an investor requires on an asset given its risk

Definition: Historical Returns
The return that an investor earned on an asset for a holding period

Definition: Equity Risk Premium
 The difference in equity returns and returns on safe investments.
 Implies stocks are riskier than bonds or bills
 Trade off always arises between risk and expected return

Definition: Return
The total gain or loss experienced on an investment over a given time period

Formula: Return on a Single Asset

Formula: Arithmetic Average Return


Difference between Geometric and Arithmetic Mean
 Arithmetic mean usually overstates the mean.
 The difference between the 2 is greater as volatility increases.
 They would be the same if there was no change in the returns

Definition: Investment Risk
Occurs because of the probability of earning a return less than that expected The greater the chance of a return below expected, the greater the risk

Standard Deviation measures...
the dispersion or variability around the expected value

Formula: Coefficient of Variation

Coefficient of Variation
 A measure of the relative dispersion of a probability distribution
 Measures the risk per unit return.
 Use: Using standard deviation to compare the riskiness of two projects can be misleading when the projects are of unequal sizes.
 A relative measure of risk

Risk Aversion
Investors are either Risk neutral, Risk Seeking or Risk Averse. Historical returns on financial assets are consistent with a population of risk averse investors

Dominance Principle
 If two assets have equal expected returns, the the one with lower risk dominates.
 if two assets are equally risky, then the one with higher returns dominates
 Can also be nondominated

Formula: Expected Return for a Portfolio

Importance of Covariance
 Risk reduciton is achieved in portfolios because fluctuations in one asset are partially offset by fluctuations in another asset.
 Risk of a portfolio depends crucially on whether the returns on the portfolio's components move together or in opposite directions.

Formula: Variance on a Two Asset Protfolio

Correlation Coefficient and Risk Reduction
 A two stock riskless portfolio can be formed if (rho) = 1
 Risk is not at all reduced if (rho) = +1
 Generall stocks have (rho) about .35

Systematic Risk
Risk related to market movements(eg interest rates)

Unsystematic Risk
 Variability of returns unique to the company.
 In a large market a protfolio of 20 randomly selected stocks eliminates most unsystematic risk

Beta
 A meausre of volatility of a security's returns relative to the broadbased market returns.
 Beta for entire market = 1 since the correlation of market portfolio returns with itself is one.



Relevant Risk
 Through diversifying, investors can eliminate unique risk, so only systematic risk is priced.
 The market compensates investors for accepting risk, but only for systematic risk

