Finance Exam #1 Chap. 1-4

bid price price at which the dealer is willing to buy
ask price price at which the dealer is willing to sell
Bid-Ask Spread The difference between the ask price and the bid price ex. bid price: 27.80 ask price: 28.60 bis-ask spread = .80
oversubscribed If there is more demand for an IPO than supply (creating a shortage), a higher price could have been charged, and the issuer could have raised more capital.
market-clearing price the highest price at which the all the shares will be sold
EPS (Earnings Per Share) EPS = Net Income / # of Outstanding Shares
Efficient Markets Hypothesis states that the stock price trades at a value equal to the intrinsic value, which is the true value of a stock.
informational efficiency of financial markets determines the ability of investors to beat the market and earn abnormal returns on their investments.
Weak-Form Efficiency implies that current market prices reflect all relevant historical and current information, such as past and current price movements. In this situation, investors will be unable to earn above-average returns simply by examining the company’s past and current stock price trends.
Semistrong-Form Efficiency implies that the current market prices reflect all relevant publicly available information. If semistrong-form efficiency characterizes a market, then investors cannot beat the market by making trades based on information reported in today’s Wall Street Journal or in a CNN news report, since the information is immediately incorporated in the company’s current share price.
Strong- Form Efficiency implies that current market prices reflect all relevant information, whether it is known publicly or privately. This means that investors (even corporate insiders) will not be able to earn above-average returns, because any information that they may trade on has already been incorporated in the current stock price.
Shareholders owners of the company
Shareholders Wealth = the # of shares that the investor owns xmarket price per share
Financial Management Study of the corporation, its investing and financing decision, analysis of its results
Capital Markets Introduction of financial instruments (stocks, bonds) including the institutions that handle them (banks) and the institutions that regulate them. (Federal Reserve)
Investment Analysis Valuing the above, including markets
EBIT Earnings from operations before interest and taxes ex. EBIT = Sales Revenue – Operating Costs
EBT Pre-Tax Income ex. EBT = Operating Income (EBIT) – Interest Expense
EBITDA Earnings before interest, taxes, depreciation, and amortization
Current Ratio Current Assets/Current Liabilities
Quick Ratio Current Assets – Inventories / Current Liabilities
Inventory Turnover Sales/Inventories
Days Sales Outstanding DSO = Receivables/Average sales per day
Fixed Assets Turnover Ratio Sales/Net Fixed Assets
Total Assets Turnover Ratio Sales/Total Assets
Debt Ratio total debt/total assets
Times-Interest-Earned TIE = EBIT/Sales
Profit Margin Net Income/Sales
Return on Total Assets ROA = Net Income/Total Assets
Return on Common Equity ROE = Net Income/Common Equity
Return on Invested Capital = EBIT (1-T) / total invested capital
Basic Earning Power BEP = EBIT (1-T) / debt + equity
Price/Earnings Ratio P/E = price per share/earnings per share
Book Value Per Share = common equity/shares outstanding
Market/Book Ratio M/B = market price per share / book value per share
The DuPoint Equation ROE = net income/sales x sales/total assets x total assets/total common equity
Gross Profit Margin gross profit/sales
Operating Profit Margin operating expenses/sales
Net Profit Margin net profit/sales
Return on Equity net profit/total equity
Equity Multiplier total assets/total equity

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