ACFI201 - 3

  1. Operating Activities
    The principal revenue producing activities of the entity and other activities that are not investing or financing
  2. Investing Activities
    The acquistion and/or disposal of long term assets and other investments not included in cash equivalents
  3. Financing Activities
    Cash Flows relating to changes in the size and/or composition of the financial structure of the entity including equity and borrowings.
  4. Formula: After Tax Cash Flows
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  5. Formula: Cash Collections from Customers
    Sales + Op acc receivable - close acc reivable - bad debts - provision for DD - discount allowed
  6. Formula: Cash paid to suppliers
    COGS +closing inventory-opening inventory + opening acc payable - closing acc payable
  7. 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
  8. Formula: Cash paid for interest
    = Interest expense + op accrued interest - close accrued interest
  9. Formula:  Cash paid for Tax 
    = Tax expense +op tax payable - close tax payable +op deferred tax - close deferred tax
  10. Risk represents....
    Return represents.....
    • The return earned on investments represents the marginal benefit of investing.
    • Risk represents the marginal cost of investing
  11. Definition: Nominal Returns
    Actual rate paid or earner before deducting the effects of inflation
  12. Definition: Real Returns
    The nominal rate adjusted for the effect of inflation
  13. 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)
  14. Definition: Expected Returns
    The return that an investor expects to earn or receive on an asset given its price, growth, potential etc
  15. Definition: Required Return
    The return that an investor requires on an asset given its risk
  16. Definition: Historical Returns
    The return that an investor earned on an asset for a holding period
  17. 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
  18. Definition: Return
    The total gain or loss experienced on an investment over a given time period
  19. Formula: Return on a Single Asset
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  20. Formula: Arithmetic Average Return
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  21. Formula: Geometric Mean
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  22. 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
  23. 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
  24. Standard Deviation measures...
    the dispersion or variability around the expected value
  25. Formula: Coefficient of Variation
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  26. 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
  27. 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
  28. 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 non-dominated
  29. Formula: Expected Return for a Portfolio
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  30. 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.
  31. Formula: Variance on a Two Asset Protfolio
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  32. 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
  33. Systematic Risk
    Risk related to market movements(eg interest rates)
  34. Unsystematic Risk
    • Variability of returns unique to the company.
    • In a large market a protfolio of 20 randomly selected stocks eliminates most unsystematic risk
  35. Beta
    • A meausre of volatility  of a security's returns relative to the broad-based market returns.
    • Beta for entire market = 1 since the correlation of market portfolio returns with itself is one.
  36. Formula: Beta
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  37. Covariance of two assets
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  38. 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
Card Set
ACFI201 - 3
week 3 cards