Stock Valuation and Return Calculation Examples
Stock Valuation Problems
NU YU Dividend Valuation
NU YU announced today that it will begin paying annual dividends. The first dividend will be paid next year in the amount of $0.57 a share. The following dividends will be $0.62, $0.77, and $1.07 a share annually for the following three years, respectively. After that, dividends are projected to increase by 3.8 percent per year. How much are you willing to pay today to buy one share of this stock if your desired rate of return is 12 percent?
Calculation
Read MoreUnderstanding Key Financial Ratios
Economic Ratios Explained
Asset Turnover Ratios
Total Assets Turnover
Formula: Net Sales / Average Total Assets
Fixed Assets Turnover
Formula: Net Sales / Average Fixed Assets (PPE – Accumulated Amortization)
Current Assets Turnover
Formula: Net Sales / Average Current Assets
Sales Profitability Ratios
Gross Profit Margin
Formula: (Net Sales – Cost of Sales) / Net Sales
Operating Profit Margin
Formula: EBIT / Net Sales
Economic Profitability Ratios
Return on Assets (ROA)
Formula: EBIT / Average Total Assets
Return
Read MoreUnderstanding Bonds, Stocks, and Market Valuation
As time passes, interest rates change in the markets, which affects the present value of a bond. When interest rates increase, the present value of the bond decreases, and when interest rates fall, the bond is worth more. There is an inverse relationship between interest rates and bond prices.
Yield to Maturity (YTM) is the opportunity rate for bonds of similar characteristics, the interest rate required in the market on a bond, and the rate implied by the current bond price. The YTM represents the
Read MoreUnderstanding Liabilities and Equity: A Deep Dive
Liabilities and Equity
Current Liabilities
Current Liabilities: Accounts payable to suppliers, notes payable, various creditors, taxes payable, customer advances.
Long-Term Liabilities
Long-Term Liabilities: Loans payable (bank loans, bonds payable).
Types of Debts
- Accounts Payable to Suppliers: Generated by credit purchases of merchandise for sale or processing.
- Salaries Payable: Wages owed to employees.
- Utilities Payable: Unpaid water, electricity, and garbage collection services.
- Interest Payable: Accrued
Investment Selection Methods: Static vs. Dynamic Criteria
Static Criteria
Static criteria do not account for the time value of money. They treat cash flows as having the same value, even when received at different times. This is unrealistic because it ignores inflation and interest rates. Consequently, static criteria can lead to flawed investment decisions.
Examples of static criteria include:
- Payback period
- Total net cash flow
- Net annual cash flow
Payback Period
The payback period represents the time required to recover the initial investment outlay from the
Read MoreArbitrage, Stock Options, and Ethical Considerations in Finance
Arbitrage and Forward Exchange Rates
Suppose, as of September 16, it was possible to buy 1 Euro for 1.1341 US Dollars, one year USD LIBOR was 0.82615% (simple interest), and one year EURIBOR was 0.128% (also simple interest).
No-Arbitrage Dollar-Euro Exchange Rate
a. What is the no-arbitrage Dollar-Euro exchange rate, one year forward?
If you buy one Euro for 1.1341 US Dollars and invest it at 0.128% for one year, you get 1.00128 Euro. Alternatively, if you invest the 1.1341 US dollars for one year
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