FIL 240 Lecture 10 Outline of Last Lecture I Market Capitalization a Round lot definition b PE Ratio c Dividend Yield II Beta a Market Portfolio b Treasury Bills c Behavior of beta d Negativity e Flight to Quality III Present Value a Equation IV CAPM a Expected market premium over risk free equation Outline of Current Lecture I Probability distribution a Contribution of operating leverage b Contribution of financial leverage II Volatility a Standard deviation equation b Alternate SD equation c Fixed expenses d Percent chance These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute III IV Time series Coefficient of variation a Measure of risk b Contribution format income statement c How to calculate the coefficient of variation Current Lecture Business Risk I II Sales are volatile Economic times can affect this Probability distribution a Contribution of operating leverage how much do the fixed costs increase the risks of our business b Contribution of financial leverage increases risk of the business Volatility of net income will be the same as volatility of EBT earnings before taxes n a Pk CFk Mean k 1 n b III IV Pk CF k k 1 2 c All fixed expenses are an increase in business risk d In a normal distribution there s a 68 chance sales will fall within that region There s a 95 chance sales will fall within 2 2 There s a 99 chance sales will fall within 3 3 Time Series sequence of data points measured typically at successive points in time spaced at uniform time intervals Example Dow Jones Industrial Avg a Very frequently measured data points Coefficient of Variation CV standard deviation mean a Measure of risk b Sales VC gross income FC Op Income Interest EBT Tax Net Income c Find mean for sales gross income op income EBT and net income d Find SD for sales gross income op income EBT and net income e After finding mean and SD you are able to calculate CV f CV at EBT will be the same as the CV at net income CV at sales will be the same as the CV at gross income g When you take away VC the CV stays the same when you take away FC the SD stays the same
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