Accounting Finance Formula

Market capitalization – number of shares outstanding multiplied by price per share (do not confuse with market capitalization rate).

Liquidity – the ability to convert an asset into cash easily and at fair value

• Long position – if you are “Long” a stock, you own it.
• Short position -- If you are “Short” as stock, you have shorted it.

• Limits and Stops are called contingent trade orders because the trade is contingent on the price.
• Margin percentage = equity/stock
• Equity=Assets-Liabilities
• For long positions the stock is an asset

[pic 1] rf= 30 year treasury (thay E(rm)-rf = MRP)

• When the constant growth DDM holds, the stock price will grow at the same rate as dividends

• Capital Gains Yield equals  ‘g’

• The Expected HPR then is: [pic 2]
• Growth Rate: g= ROE * b
• b= plowback ratio= (1- payout ratio)
• payout ratio = div/EPS
• ROE = Net Income/Shareholder’s Equity
• The capital asset pricing model (CAPM) defines the relationship between risk and return

E(RA) = Rf + βA(E(RM) – Rf)

• Risk-free rate

Analysts and Corporations typically use current market yields on long-term bonds

• The expected risk premium of an asset depends on the market risk premium and the systematic risk of the asset

[pic 3]

• the CAPM’s expected return-beta relationship [pic 4]
• Intrinsic value : [pic 5]  V0= intrinsic value ; E(D1) = expected dividend;E(P1) = expected price; k=market capitalization rate
• Next year intrinsic value [pic 6]

Buy stock and hold it for 2 years: [pic 7]

• Parameters for Capm

     Risk-free rate

• Textbooks use average historical value  (most recent edition of text uses 3.7%
• Analysts and Corporations typically use current market yields on long-term bonds

• Market Risk premium – Updated 2014

• Fernandez1 – surveyed analysts, academics and corporations:  5.4%
• Damodaran – calculated: 5.28%  http://people.stern.nyu.edu/adamodar/

• Beta

• Calculated based on historical data
• Many different parameters depending on source
• Check multiple sources
• Calculate it in Excel

Remember this forever:  The value of any asset is equal to the present value of all future cash flows related to that asset

• The value of a bond is the present value of its coupon payments and face value to be received at maturity.
• The value of a stock is the present value of its expected dividends and expected future price.
• Constant Growth Dividend Discount Model

The constant dividend growth model is only valid when ‘g’ is less than ‘k’

assume that they grow at a constant rate, we have : [pic 8]