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23 Cards in this Set
- Front
- Back
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CAPM
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Capital asset pricing model
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Expected return
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Return an individual expects a stock to earn over the next period
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Variance
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Measure of the squared deviations of a security's return from its expected return
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Standard deviation
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Square root of the variance
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Covariance
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Measure of the interrelationship between two securities
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Correlation
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Restatement of interrelationship between two securities (cf. covariance)
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CAPM formula
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Ṝ = Rf + B x (Ṝm - Rf)
Expected return on security = risk-free rate + beta of the security x difference between expected return on market and risk-free rate |
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WACC
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Weighted average cost of capital
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WACC meaning
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How much it costs a firm to get capital. Can be used in NPV calculations as discount rate.
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WACC formula
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(S / ( S + B) ) * Rs + ( B / ( S + B) ) * Rb x (1 - tc)
S = current market value of stock B = current market value of debt Rs = cost of equity Rb = cost of debt tc = tax rate for firm (since debt interest is tax deductible) |
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Pro forma
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In business, pro forma financial statements are prepared in advance of a planned transaction, such as a merger, an acquisition, a new capital investment, or a change in capital structure such as incurrence of new debt or issuance of equity. The pro forma models the anticipated results of the transaction, with particular emphasis on the projected cash flows, net revenues and (for taxable entities) taxes.
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Market risk premium
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Rm - Rf
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YTM
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Yield to Maturity
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YTM Formula
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P =
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PVIF
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Present Value Interest Factor
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PVIF Formula
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1 / ( 1 + r ) ^ t
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EAR
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Effective Annual Rate
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EAR Formula
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( 1 + i / n ) ^ n
i = nominal interest rate n = number of periods compounded per year |
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Par value
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Par value, in finance and accounting, means stated value or face value.
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If holding to maturity, how to determine if purchaser of maturity has capital gain or loss.
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if par value < bond price, capital loss.
If equal, neither If par value > bond price, capital gain. |
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Is a bond trading at a premium or discount?
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Depends on current rate:
if discount rate > yield, will trade at a premium i.e. if interest rate falls below coupon rate, bond would trade at a premium. |
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Gordon growth model
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A model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate.
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Gordon growth model formula
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P = D / ( k - G )
P = price of stock D = expected dividend per share 1 yr from now k = required rate of return G = growth rate in dividends |
