COMM 308 Study Guide - Final Guide: Sharpe Ratio, Discount Window, Capital Market
Document Summary
Do = current or paid dividend g = b x roe. B: retention ratio (reinvested dividends in company) (cid:314) 1- payout ratio. Roe = net income / common equity: roe = net profit margin x turnover ratio x leverage ratio. Dividend discount model: values common shares by assuming that they are valued according to the present value of their future expected dividends. Constant growth ddm: assume dividends grow at a constant rate indefinitely. Discount rate to be used when analyzing an investment project is: rate of return which financial markets offer on investments of similar risk. To accept a project, npv >0 or profitability index (pi) has to be >1 and irr has to be more than the cost of capital or discount rate (k). With capital rationing, pi would be better because it measures the % return per $ invested. In all other situations, npv would be better because it measures the total wealth change.
