Chapter 9 Outline Fin4151

Chapter 9 Outline Fin4151 - Chapter 9 For the Investor...

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Chapter 9 For the Investor Financial Leverage Interest is tax deductible Dividends are not tax deductible If borrowed funds can be invested in a business and earn more than the cost of borrowing the funds the company is better off. The greater debt used will cause greater financial leverage. The more financial leverage the more sensitive net income is to changes in Ebit. Earnings Per Share Information needed: 1. Net Income 2. Preferred dividends 3. Common shares outstanding Net Income – Preferred Dividends Earnings per share = Weighted Common Shares O/S The effects of stock dividends and stock splits are considered to have occurred at the beginning of the period being presented. Diluted Earnings Per Share The weighted common shares outstanding are increased for the effects of: Convertible securities Warrants Options
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Price Earnings Ratio Market Price of a share of stock Diluted EPS before non rec items A high PE ratio relative to the market indicates growth potential
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