Equity return

Industry Return on equity (%) Return on assets (%) Debt-to-equity ratio... 

The timing, as well as extent, of defaults is critical to equity return. As a general matter, equity holders receive a significant part of their return early in the life of a transaction. This is because the initial excess spread tends to be highest given that defaults are unlikely to occur until later on in the deal s life. The later in a CDO s life that defaults occur, the less the return to the equity holder will be affected. Examples of equity returns patterns and their sensitivity to default will be demonstrated later in case studies. 

BS model is widely used in finance where the log-return of asset price is considered to be normally distributed (Platen Health 2006). However, equity returns distribution presents several realistic properties not found in the ideal BS model (1) the presence of jumps represented by large random fluctuations such as crashes or sudden upsurges, (2) the log-return distribution are skewed. 

Describe key financial measures of firm performance. The key financial measures of firm performance include return on equity return on assets accounts payable turnover profit margin asset turnover and accounts receivable turnover inventory turns property, plant, and equipment turns and cash-to-cash cycle. 

Capital Investment. Erom the viewpoint of a project, all of the capital that must be raised is external capital. Equity capital is the ownership capital, eg, common and preferred stocks or retained cash, whereas debt capital consists of bonds, mortgages, debentures, and loans. Nearly all investment involves a mixture of both types so as to maximize the return on investment (21). The debt ratio (debt/total capital) for the chemical industry is typically over 30%. Because financial details are not well known during the preliminary phases of project analysis, the investment is viewed simply as the total capital that must be expended to design and build the project. 

Detained Darnings. After the equity earnings are subtracted from the net after-tax earnings, the balance is called the retained earnings and represents an iacrease ia equity. The retained earnings can be visualized theoretically as the new cash generated beyond that needed to provide for a return to iavestors and an orderly retirement of the investment. 

The attitude of management is also an important factor in deter-TABLE 9-22 Return on Equity after Tax for Companies X and Y... 

Purchase and Sale of Equities Stockholders usually reqmre an adequate return on their investment, and the quoted price of the stock reflec ts the consensus opinion of investors as to the current health of the company. Purchases or sales are normally made through stockbrokers. 

Row 3 in Table 9-24 is the return on equity (ROE) of Eq. (9-130). In this case, the net worth is the tangible net worth representing the sum of the preferred and common stocks and the surplus and undistributed profits or retained earnings, less any intangible items such as goodwill, etc. 

Equity holders require a real return on their outlay, which they assume to be at the stock-market price if this differs from the face value of the stock, of 7 percent net of all taxes. Retained earnings attract a 40 percent capital gains tax hence the actual interest rate required on distribution forgone is 7/(1 — 0.40) = 11.67 percent. This is in real terms and at a time of 8 percent inflation rate must be increased in cash terms to (1 -I- 0.1167)(1.08) — 1 = 20.60 percent. 

A simple return on equity can be used as a yardstick. Utilities are required by regulators to set their rates to obtain a given rate of return. This return is usually constant over the years and from project to project, so management must choose among projects on some basis other than profit. 

In free enterprise projects, the return on equity will probably vary from year to year so an average would have to be used. However, use of an average would consider return in later years to be as valuable as income in the first year of operation, which is not true. 

Banks are not in business to take risks. They rent money and do everything they can to insure the return of their principal as well as the interest. Elaborate rating systems have been developed to measure each company s ability to repay its loans. One criterion is the debt to equity ratio. The higher the debt the more risk in a loan, and the higher the interest rate. 

The money used in a project must be returned by the project with interest whether it comes from debt or equity. The recent swings in the cost of money have brought to everyone s attention the complexity of setting return and interest rates for feasibility studies. If a project is ready to be built and the loans have been negotiated, the interest rate can be determined accurately. Establishing the interest rate for a feasibility study on a project that will not be built for one or more years in the future is difficult and becomes a policy decision that should be set by management. The same rate should be used on all studies to keep the yardstick the same length. 

Required revenues are the sum of operation and maintenance expenses, depreciation, taxes, and a return on rate base. The rate base is the total amount of fixed capital used by the utility in producing, transmitting, and delivering electricity. The return on rate base IS the weighted average cost of capital, including debt and equity sources. 

Furthermore, the price elasticities of demand for pharmaceuticals are likely to differ depending on individuals income. If low-income households have a more price-elastic demand, an increase in co-payment will cause them to make a proportionally larger reduction in their pharmaceutical consumption than high-income households. The same thing could happen if we make the comparison in terms of levels of health. We are faced with equity problems, to which we will return below. 

In Honduras an energy-efficient power plant used all the wastes of a large lumber mill. It sold power to the grid, produced an internal rate of return on equity investment of 75%, and paid back the initial investment in about three years. 

Its emphasis on metrics is evidenced by the fact that SYSCO s top ten executive officers meet every Wednesday afternoon and review several hundred metrics for every one of the 157 operating units prior week s performance. SYSCO measures everything related to the receipt, movement, and delivery of products and services to its customers, to new business development, and to every expense and capital expenditure. It measures its return on equity on a weekly basis. 

InterTechnology Corp. (7) analyzed the energy plantation concept, in which fast growing plant species are cultivated for biomass yield. For a plantation of hybrid poplar, total capital and operating costs in an unspecified U.S. location - from clearing the land to delivering wood chips - require a total revenue per oven dry tonne of 15.25 (in early 1975 dollars)(Table III). This assumes a 15% after-tax return on equity. The estimate is based on a yield of 20.2 oven dry tonnes per hectare. For a yield of 9... 

There is a relationship between these two documents because information obtained from each is used to calculate the returns on assets and equity. Figure 9-1 is an operating profitability tree for a fictitious... 

Return on net worth (return on equity) Net profit after taxes/net worth 15%... 

Industry profits are indeed high related to those found in other sectors, notably service (retail and wholesaler) industries. This is due in part to the fact that the pharmaceutical industry is asset-intensive rather than labor-intensive, which leads to a low asset-to-sales turnover ratio, which in turn leads to a high rate of return on equity. Conversely, sectors with low asset-to-sales turnover ratios will have low rates of return on equity. 

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