Module 12

Monetarist Theory

Fed controlling the influence of the economy by controlling money supply and influencing interest rates.

Keynesian Theory

Theory that the government must spend money to stimulate the economy. This theory is based off of spending and consumption.

Supply side theory

the belief that lower taxes and fewer regulations will stimulate the economy

Three types of investment types

Consumer
Business
Financial/Securities

Passive Management

Assumes the markets are efficient. Usually lower management fees.

Active management

Assuming you can try to actively try to mange accounts to beat bench marks.

Short against the box

Strategy that locks in return by going short the same # of shares as the long position

Arbitrage

the purchase of securities in one market for immediate resale in another to profit from a price discrepancy. Like day trading.

Wilshire 5000 Total Market Index

Index now contains more than 5,000 stocks. The Wilshire 5000 is the broadest index of the U.S. stock market.

Fundamental Analysis

Study of companys financial statements
Balance Sheet
Income
Earnings
Dividends
Ratioss

Whats a companies Full Financial Statement consist of?

Balance Sheet
Income Statement
Cash Flow
Shareholder equity

What is the formula that best describes a Balance sheet?

Assets = Liabilities + Net worth

What are Current assets? ***

All assets that are normally converted into cash in the ordinary course of business WITHIN a year.
Generally Cash+Accounts Receivable + Inventory

Fixed Assets

Assets that are not intended for sale, but bought to produce income like machinery.

Other assets

Intangible assets are trade marks, patents etc.

Liabilities

Amounts owed to other companies/individuals
two categories: Current and long term liabilities.

Current Liabilities

liabilities due within a year.

Long term liabilities

liabilities owed for more than a year

Net worth

The amount the shareholders would get if the company were to liquidate the business on the date of the balance sheet.

Book Value Formula

(Net worth - Preferred PAR)/(Number of outstanding shares)

S.O.N.A.R

Sales, Operating Cost, Net Income, Available Earnings, Retained Earnings

E.D.I.T

Expenses, Depreciation, Interest, Taxes

D.D

Dividend & dividend Preferred and common.

Determine operating income subtract SONAR

...

EPS formula

Divide the available earnings then divide that amount by the common shares outstanding.

Current Ratio

Current Assets/ Current Liabilities
ability for company to pay current liabilities.

Quick Asset Ratio

Current Assets- Inventory / Current Liabilities
used to determine inventory hard to convert into cash

Debt/Equity Ratio

Longterm Debt/ Net worth
Used to determine the debt the company is using relative to shareholder equity.

Dividend Payout Ratio

Common Dividends/Available Income OR
Common dividends per share / EPS
Indicates the percentage of the company's total net income that is paid to shareholders.

Working Capital

WC= Current Assets - Current Liabilites

What happens when a bond is issued?

Total assets, liabilities, and working capital are affected.

What happens when Convertible bond is issued?

Liabilities are affected.

What happens when dividends are declared?

Current liabilities, retained earnings, and net worth, and working capital is affected.

Equipment is purchased for cash?

Only working capital is affected (current/fixed assets)

Alpha

Measurement of a stock or portfolios return, independent of market related factors.

Beta

Measurement of volatility of a stock or portfolio compared to the market.

Dow theory

Market prices reflect all available information and confirms up or down trend.

Odd Lot Theory

A technical analysis theory based on the assumption that the small investor is always wrong. Therefore, if odd-lot sales are up�that is, small investors are selling stock�it is probably a good time to buy.

Advance-decline

if the advance-decline ratio rises faster than the index, a rise in the market will occur (and vice versa).

Capital Asset Pricing Model (CAPM)

Method used to compare systematic risks with expected returns.

Important fundamental analysis factors are

Debt/Equity ratio
Fixed Charges Coverage

Two formulas used to calculate fixed charge coverage

The interest coverage ratio:
Total Revenues - Expenses /Yearly Interest
?
The debt service coverage ratio:
Total Revenues - Expenses/
Yearly Interest and Principal Payment

Net Direct Debt

Old Debt + Newly Proposed Debt/ City pop