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Payout Ratio

Payout Ratio is the percentage of earnings paid out to shareholders.

It is equal to one minus the retention ratio.

It is commonly written as (1 – b)

It can be calculated as Dividends Per Share / Earnings Per Share

Labor growth can be accomplished by:

  1. An increase in the labor force participation rate.
  2. An increase in average hours worked.
  3. Additional supply of labor by immigration.
  4. A higher population growth rate.

The ____ the accrual ratio the ____ the earnings quality.

The lower the ratio, the higher will be the quality of the earnings.

The temporal method is required if the foreign subsidiary is…

…operating in a highly inflationary environment, defined as cumulative inflation of more than 100% in a 3-year period.

The FCFF model is better than the FCFE model when valuing:

Debt laden, cyclical companies and companies with a changing capital structure.

The CFA Institute Research Objectivity Standards recommend that rating systems include three elements:

  1. Recommendations or rating categories
  2. Time horizon categories
  3. Risk categories

In Scenario Analysis…

…the analyst simultaneously changes several key variables to generate several different scenarios.

Generally three scenarios are created:

  1. Best
  2. Worst
  3. Most Likely

Market Value Added formula

MVA = market value of (total) capital – book value of capital

Capital = debt plus equity in this case basically L+SE.

Static trade-off theory states

That the optimal level of debt is achieved when the extra cost of financial distress equals the tax benefit of debt.

Pecking-order theory ranks

Internally generated equity (retained earnings) > New Debt > New Equity

One reason for this is less disclosure for projects funded by internally generated equity.

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