FIL 240 Lecture10Outline of Last Lecture I. Market Capitalizationa. Round lot definitionb. PE Ratio c. Dividend YieldII. Betaa. Market Portfoliob. Treasury Billsc. Behavior of betad. Negativitye. Flight to QualityIII. Present Valuea. EquationIV. CAPMa. Expected market premium over risk free equationOutline of Current Lecture I. Probability distributiona. Contribution of operating leverageb. Contribution of financial leverageII. Volatility a. Standard deviation equationb. Alternate SD equationc. Fixed expensesd. Percent chanceThese 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. Time seriesIV. Coefficient of variationa. Measure of riskb. Contribution format income statementc. How to calculate the coefficient of variationCurrent LectureBusiness Risk- Sales are volatile- Economic times can affect thisI. Probability distributiona. 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 businessII. Volatility of net income will be the same as volatility of EBT (earnings before taxes)a.δ=¿Mean – ∑k=1nPkCFkb.∑k=1nPk(CFk−μ)2δ=√ ¿)c. All fixed expenses are an increase in business riskd. In a normal distribution, (μ−δ ,μ+δ ¿, there’s a 68% chance sales will fall within that region. There’s a 95% chance sales will fall within (μ−2 δ ,μ+2 δ ¿ .There’s a 99% chance sales will fall within(μ−3 δ , μ+3 δ). III. 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 pointsIV. Coefficient of Variation (CV) - standard deviation(δ ¿/mean(μ¿a. Measure of riskb. Sales – VC = gross income – FC = Op. Income – Interest = EBT – Tax = Net Incomec. Find mean for sales, gross income, op. income, EBT, and net incomed. Find SD for sales, gross income, op. income, EBT, and net incomee. 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 incomeg. When you take away VC, the CV stays the same; when you take away FC, the SD stays the
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