RSM333H1 Chapter Notes - Chapter 20: Earnings Yield, Operating Leverage, Retained Earnings
Document Summary
Net total assets are financed using debt or equity. Debt-to-equity ratio: interest-bearing debt / (shareholders" equity + minority interest) Market-to-book ratio: market price per share / book value per share. Earnings yield: estimate of investors required rate of return; cost of equity capital to firm. Can use perpetuity formula to find earnings targets, assuming earnings are perpetuity. Given amount of debt/equity and required returns, can find earnings to meet investor expectations. Knowing required earnings target, can work backwards up income statement to find revenue. Approach used in regulated industries such as utilities. Regulators limit profits (earnings), work from regulated profit to see what price company can charge customers. Return on invested capital (roic): ebit/book value of invested capital. Eps = ni/# of shares = ni/equity * equity/# of shares = roe * bvps. If roe > ke, demand for stock increases, so price is higher than book value.
