Reading...
Play button
Play button
Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
77 Cards in this Set
- Front
- Back
|
2 reasons why Return on Equity important.
|
It's about shareholder wealth and profit margin.
|
|
|
ROE =
|
[net income] / [stockholders' equity]
|
|
|
Book value per share =
|
[total stockholder equity] / [# of shares outstanding]
|
|
|
Dividends must be paid out of...
|
Retained Earnings
|
|
|
What are the 2 ways to make a buck in business?
|
Increase sales & decrease costs
|
|
|
ROE =
|
margin x turnover
|
|
|
why are decreasing costs not a sustainable profit margin advance?
|
because you can only decrease so much.
you will always have some fixed costs. |
|
|
ROA brings what into play?
|
leverage
|
|
|
With ROA, what is substituted for with assets?
|
turnover
|
|
|
name the 2 types of risk involved in ROE
|
business risk and financial risk
|
|
|
what is business risk?
|
the variability of the sales dollar.
the more variable the dollar, the more risk you have |
|
|
What does profit margin let you do?
|
squeeze out a higher incremental return
|
|
|
what 3 things is stockholders' equity made of?
|
retained earnings,
paid in capital (paid in surplus), and par value |
|
|
as we turn equity, we can get the highest possible ROE which leads to what?
|
the exponential price to book of equity value
|
|
|
name the 2 companies that exemplified the 2 ways to make a buck in busiess
|
the washington post
and gilette |
|
|
book value per share does not include what?
|
preferred stock
|
|
|
what is the goal of any corporation?
|
to maximize shareholder wealth
|
|
|
Buffett wants a high ROE but without what?
|
an excess use of debt
|
|
|
name the 3 key financial decisions in a corporation
|
1. propoer allocation of capital as an investment
2. secure capital 3. dividend decision |
|
|
what issues are involved int eh proper allocation of capital as an investment?
|
marginal revenue
what the company is going to invest in consider: using capital budgeting techniques and the present values of inflows versus the present values of outflows |
|
|
a project should be accepted under which net present values?
|
when the NPV is zero or positive
|
|
|
What are the key issues in the dividend decision?
|
whether to retain or pay out the $$$
a decision made by the CEO, CFO, and board |
|
|
payout of dividends tends to be a function of what?
|
an inability to make capital investments.
if you can't make capital investments that give you a high rate of return, the only way to save the value of the business is to pay out dividends. |
|
|
in which part of the life cycle is a company that is paying out dividends?
|
the mature -> stabilize -> decline stages
|
|
|
what do you never do to a dividend?
|
cut it.
you do not have to increase a dividend and you never have to instate it, but you never cut it |
|
|
what does cutting a dividend signal?
|
it signals the company is not doing well.
the higher the payout ratio, the more damning the cut becomes |
|
|
in signaling theory, it is important to consider what 3 ideas?
|
communication
willingness to serve common purpose |
|
|
every manager needs to consider what?
|
how to plan, organize, staff, control, direct, and be safe
|
|
|
cash flow is extremely important because...
|
free cash flow with a large sales growth is always the objective
|
|
|
operating cash flow =
|
EBIT + depreciation - taxes
|
|
|
net income + a non cash outlay =
|
cash flow
|
|
|
owner's income is?
|
subtracting capital expenditures to maintaing growth rate g
|
|
|
owner's income includes what elements?
|
working capital, plant, and equipment
|
|
|
owner's income =
|
net income + non cash outlays = cash flow
cash flow - capital expenditures to maintain growth rate g = owner's income |
|
|
free cash flow
|
owner's income - dividends
|
|
|
Why is Buffett concerned with owners’ income?
|
Because that’s what he uses to take over companies.
|
|
|
What 4 options does a company have to use free cash flow?
|
Buy back stock
Make strategic capital investments beyond making a strategic acquisition Pay down debt, but not to the point of being debt free Increase dividends |
|
|
Do dividends create growth?
|
no
|
|
|
John Burr Williams published what book in 1938?
|
The Theory of Investment Value
|
|
|
What was The Theory of Investment Value about?
|
It was Williams trying to figure out what went wrong in the crash of 1929.
He wanted to answer: What went wrong? What was the underlying tell tale sign? |
|
|
Today’s stock market is mostly about what?
|
Speculation
|
|
|
What is the kingpin theory of finance?
|
We buy stock for the present value of its future stream of dividends
|
|
|
In time all companies will pay dividends. True or False?
|
True
|
|
|
With the Time Value of Money, almost all value is generated in the first how many years?
|
100 years
|
|
|
Classically speaking, the dividend discount model goes to how many years?
|
Infinity
|
|
|
Buffett says that the growth rate of a stock ceases after which year?
|
10
|
|
|
What happens to the capital expenditure ratio of a stock after year 10, according to Buffett?
|
It goes to 0
|
|
|
Dividends cannot be postponed. True or False?
|
False
|
|
|
Why does Buffett stop considering a stock’s growth after year 10?
|
Because he cannot predict it
|
|
|
Net cap rate =
|
k - g
|
|
|
At the end of year 10, what should the earnings equal?
|
The dividends
|
|
|
Where we would say it’s the present value of the dividends, Buffett would say it’s the present value of what?
|
The owners’ income
|
|
|
Should we consider investing in anything below an AAA bond rate?
|
no
|
|
|
Financial risk is represented by which ratio?
|
The debt to equity ratio
|
|
|
What is Buffett's recommended margin of safety?
|
20%
|
|
|
You should only buy a stock what percent below its intrinsic value?
|
20%
|
|
|
Financial markets perceive risk as what?
|
The risk of price variance
|
|
|
What do we use to account for price variance?
|
Beta (volatility)
|
|
|
How Graham and Buffett perceive risk?
|
As the risk of losing further money
|
|
|
Buffett considers the company doing what to be the true definition of risk?
|
Going bankrupt
|
|
|
What does Buffett say of systematic risk?
|
That the market is going to do what the market is going to do
|
|
|
What is the modern way of coming up with the discount rate?
|
CAPM
|
|
|
What does CAPM stand for?
|
Capital Asset Pricing Model
|
|
|
What is the CAPM equation?
|
**
|
|
|
When is Beta more risky than the market?
|
When Beta > 1
|
|
|
When is Beta less risky than the market?
|
When Beta < 1
|
|
|
Graham would tolerate a little more debt than financial variability would suggest if they had what?
|
A low earnings variability
|
|
|
15% is the magic number for what?
|
price to book
|
|
|
dividends have to be paid out of what?
|
retained earnings
|
|
|
Dupont System of Financial Analysis
|
3. If our Sales/ dollar of equity are faster, then our Turnover of equity will be higher and our Turnover of total assets is higher too.
|
|
|
what is financial risk?
|
increasing corporate value with debt
|
|
|
what is the goal of corporate value?
|
to Maximize shareholders’ wealth by increasing ROE
|
|
|
Define the Payoff ratio
|
percent of dividends paid as a percent of earnings.
|
|
|
Cash flow =
|
net income + noncash outlays (depletion, depreciation)
|
|
|
why is Free cash flow with a large growth rate always the objective?
|
because it gives us an indication of what is remaining in the company.
|
|
|
What 4 things can you do with free cash flows?
|
1.Buy back common stock (does contribute to excess abnormal returns)
2.Pay down debt (but not debt free because of the tax) 3.Increase dividends 4.Strategic acquisitions |
|
|
should you invest in compaies that are paying dividends?
|
no
|
