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Financial notes Jan 26

Financial notes Jan 26 - If I can borrow at 5 and have a...

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Financial notes Jan 26 Market Makers – a group of specialist traders that buy shares when som1 wants to buy and sell when som1 wants to buy The spread – differences in price between price the market makers get the stock at and sell it If there is a lot of liquidity there is more of a drive toward equilibrium price and market makers aren’t as needed If there’s not, the market makers may be forced to hold shares Financial statement analysis comes in 2 forms – those that reflect return and those that reflect risk Analyze balance sheet and income statement Balance sheet is listed in declining order of liquidity Retained earnings is the part of net income that is being reinvested in the firm In today’s uncertain economy companies are keeping very high cash reserves
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Unformatted text preview: If I can borrow at 5% and have a return on assets of 7%, earning 2% due to leverage As long on ROA is greater than ROD (return on debt) I am having positive leverage and my ROE is going up. – spread The amount of debt to equity also plays a role in the profitability of the company – as one takes more debt the spread decreases If your operating income drops the interest payments can swamp your business – leverage is a double edged sword Stability of cash flow is more important than average cash flow because it allows u to push up your leverage More assets mean more depreciation – which means more free cash flow...
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