mitch k.

One Period Return-Common Stock

P_{t-1}

Expected Return of a portfolio

(Wj)(Rj)

(Proportion of total funds invested in "j")(expected return for security "j")

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Systematic Risk

Unsystematic Risk

Standard Deviation for security or a portfolio

Non Diversifiable (systematic) + Diversifiable (nonsystematic)_{}

standard deviation^{N}_{j }+ Standard^{ }Deviation(R j,m)

(R j,m)=correlation coefficient between security return and return on market

Characteristic Line

Determines the degree of systematic risk.

Beta

Slope of the characteristic line. **Greater the beta the greater the unavoidable risk. **

Portfolios Beta

Weighted average of the individuals tock betas in the portfolio. Beta of a stock represents its contribution to the risk of a highly diversified portfolio of stocks

Market Portfolio

Has a beta = 1

Required Rate of Return for a Stock

Rf+(Rm-Rf)Beta

Risk free rate(expected return-risk free rate)beta coefficient

Risk free rate(expected return-risk free rate)beta coefficient

Net Working Capital

Current Assets-Current Liabilities

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Gross Working Capital

The firms investment in current assets

Working Capital Management

The administration of the firms current assets and the financing needed to support current assets

2 Principals of Working Capital Management

1. Profitability varies inversely with liquidity

2. Profitability moves together with risk

ROI

Cash+A/R+INV+FA

Temporary Working Capital

The amount of current assets that varies with the seasonal requirements

Permanent Working Capital

The amount of current assets required to meet the firms long term minimum needs

Hedging

Each asset would be offset with a primary instrument of the same approximate maturity

Asset Short Term/Maturity Short Term

Moderate Risk

Asset Long Term/Maturity Short Term

High Risk

Asset Short Term/Maturity Long Term

Low Risk

Asset Long Term/Maturity Long Term

Moderate risk

"Rule of Thumb" for LockBox

Firms will benefit from speeding up cash receipts and slowing down cash payments

Lockbox Evaluation

(Cost per Remittance x Total Number of Remittances per year) + FC **VS (**Total Yearly Receipts/365 x Days Saved x Opportunity Cost as %)

Variable Costs

Cost Per Remittance x Total number of remittances per year

Cash freed up

(Total Yearly Receipts/365) x (Days Saved)

Accounts Receivable Conversion (ARC)

Process where checks are converted into Automated Clearing House (ACH) debits. **Reduces availability float associated with check clearing**

Float

The dollar difference between the balance shown in a firms checkbook balance and the balance on the banks books

Cost of not taking discounts

(%discount/100%-%discount) x (365/payment date-discount period)

Money Market Instruments Backed by the Govt

Bills

Notes

Bonds

Commercial Paper

Short Term unsecured promissory notes. Generally issued by corporations

Total Carrying Costs of Inventory

(Carrying Cost Per Unit) x (Average Units of Inventory)

Order Point

Lead Time x Daily Usage

EOQ

Square Root of __(2)(Ordering Cost Per Unit)(Usage per Period)__

Carrying Cost Per Unit Per Period

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