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Definition of rate of return
rate of return
Total income per period per dollar invested.
Rate of Return
return on invested capital (calculated as a percentage). Often an investor has, as one of their investment criteria, a minimum acceptable rate of return on an acquisition.
A method of investment appraisal that measures
the rate of earnings obtained on the average capital investment over the life of a capital project; computed as average annual profits divided by average investment; not based on cash flow
Money after-tax rate of return minus the inflation rate.
Arithmetic mean return.
The ratio of the average cash inflow to the amount invested.
Accounting income divided by book value.
Also called the internal rate of return, the interest rate that will make the
IRR on the incremental investment from choosing a large project
Dollar-weighted rate of return. Discount rate at which net present value (NPV)
a. The average annual yield earned by an investment during the period held.
The rate of return at which the present value of a series of future
A discounted cash flow technique used for investment appraisal that calculates the effective cost of capital that produces a net present value of zero from a series of future cash flows and an
The precise discount rate that makes the
The discount rate that equates the present value of the net cash
the expected or actual rate of
internal rate of return (IRR)
Discount rate at which project NPV = 0.
Money rate of return
Annual money return as a percentage of asset value.
Portfolio internal rate of return
The rate of return computed by first determining the cash flows for all the
RATE OF RETURN ON STOCKHOLDERS’ EQUITY
The percentage return or profit that management made on each dollar stockholders invested in a company. Here’s how you figure it:
RATE OF RETURN ON TOTAL ASSETS
The percentage return or profit that management made on each dollar of assets. The formula is:
Rate of return ratios
Ratios that are designed to measure the profitability of the firm in relation to various
Riskless rate of return
The rate earned on a riskless asset.
Target rate of return pricing
A method of pricing that estimates the desired return on investment to be achieved from the
Time-weighted rate of return
Related: Geometric mean return.
Multiple rates of return
More than one rate of return from the same project that make the net present value
The alpha of a fund is determined as follows:
Annual percentage yield (APY)
The effective, or true, annual rate of return. The APY is the rate actually
Annualized holding period return
The annual rate of return that when compounded t times, would have
Asset pricing model
A model for determining the required rate of return on an asset.
Asset pricing model
A model, such as the Capital Asset Pricing Model (CAPM), that determines the required
Price expressed in terms of yield to maturity or annual rate of return.
Beta equation (Mutual Funds)
The beta of a fund is determined as follows:
Beta equation (Stocks)
The beta of a stock is determined as follows:
Bull CD, Bear CD
A bull CD pays its holder a specified percentage of the increase in return on a specified
Refers generally to analysis procedures for ranking
capital investment analysis
Refers to various techniques and procedures
company cost of capital
Expected rate of return demanded by investors in a company, determined by the average risk of the company’s assets and operations.
Corporate taxable equivalent
rate of return required on a par bond to produce the same after-tax yield to
Cost of Capital
The minimum rate of return a company must earn in order to meet
Cost of Common Stock
The rate of return required by the investors in the common stock of
Cost of Equity
Same as the cost of common stock. Sometimes viewed as the
Cost of lease financing
A lease's internal rate of return.
Cost of Preferred Stock
The rate of return required by the investors in the preferred stock of
Covariance of a national economy's rate of return and the rate of return the world economy
the rate of return on investment that would be required by a prudent investor to invest in an asset with a specific level risk. Also, a rate of return used to convert a monetary sum, payable or receivable in the future, into present value.
the rate of return used to discount future cash
A rate of return used to convert a monetary sum, payable or receivable in the future, into present value.
Discounted Cash Flow
Techniques for establishing the relative worth of a future investment by discounting (at a required rate of return) the expected net cash flows from the project.
dividend growth method
a method of computing the cost
Effective Annual Yield
Annualized rate of return on a security computed using compound
Efficient Market Hypothesis
In general the hypothesis states that all relevant information is fully and
A way of decomposing the factors that influence a security's rate of return into common and
The equity (ownership) capital of a business can serve
A theory that nominal interest rates in two or more countries should be equal to the required real
the rate of return that equates the present values
Geometric mean return
Also called the time weighted rate of return, a measure of the compounded rate of
guaranteed investment certificate (GIC)
A GIC is an investment that gives you a guaranteed rate of return over a fixed period of time, usually between 30 days and 5 years. GICs are available from banks, trust companies, and other financial institutions.
Holding period return
The rate of return over a given period.
a preestablished rate of return against which
The minimum rate of return that a capital purchase proposal must pass
A pre-determined benchmark rate of return. If the rate of return expected from the project or investment falls below the benchmark, the projected investment will no longer be accepted.
The expected volatility in a stock's return derived from its option price, maturity date,
Intrinsic value of a firm
The present value of a firm's expected future net cash flows discounted by the
See internal rate of return.
judgmental method (of risk adjustment)
an informal method of adjusting for risk that allows the decision maker
MM's proposition II
The required rate of return on equity increases as the firm’s debt-equity ratio increases.
net present value method
a process that uses the discounted
opportunity cost of capital
the highest rate of return that
opportunity cost of capital
Expected rate of return given up by investing in a project.
Ratios that focus on the profitability of the firm. Profit margins measure performance
project cost of capital
Minimum acceptable expected rate of return on a project given its risk.
return on capital
income; it is equal to the rate of return multiplied by the amount of the investment
RETURN ON INVESTMENT (ROI)
In its most basic form, the rate of return equals net income divided by the amount of money invested. It can be applied to a particular product or piece of equipment, or to a business as a whole.
Risk measures the possibility that your investment may lose or gain value as compared to the expected rate of return. Risk is different from uncertainty, which is not measurable.
The rate of return on an investment with known future benefits; a
The rate of return obtainable on government of Canada treasury bills.
The additional rate of return required on a risky project
The difference between the required rate of return on a riskless asset with the same expected life.
Rule of 72
This is a very important rule to know. The rule is that the number 72 divided by the rate of return of your investment equals the number of years it takes for your investment to double.
Security Market Line
A graph illustrating the equilibrium relationship between the
In performance measurement, the actual rate of return realized over some evaluation period. In
A measure of the excess return per unit of risk, where excess return is defined as the
a. Another general term for sensitivity. b. The standard deviation
weighted average cost of capital
a composite of the cost of the various sources of funds that comprise a firm’s capital structure; the minimum rate of return that must be earned on new investments so as not to dilute shareholder value
weighted-average cost of capital (WACC)
Expected rate of return on a portfolio of all the firm’s securities, adjusted for tax savings due to interest payments.
The percentage rate of return paid on a stock in the form of dividends, or the effective rate of interest
Yield to maturity
The percentage rate of return paid on a bond, note or other fixed income security if you
Yield to Maturity
The measure of the average rate of return that will be earned on a
Yield to maturity
A measure of the average rate of return that will be earned
Part of the return that is not due to systematic influences (market wide influences). In
Absolute Right of Return
Goods may be returned to the seller by the purchaser without restrictions.
Accelerated cost recovery system (ACRS)
Schedule of depreciation rates allowed for tax purposes.
Any depreciation method that produces larger deductions for depreciation in the
(1) The estimated useful life of the fixed asset being depreciated is
Any of several methods that recognize an increased amount
Active portfolio strategy
A strategy that uses available information and forecasting techniques to seek a
Adjustable rate preferred stock (ARPS)
Publicly traded issues that may be collateralized by mortgages and MBSs.
All equity rate
The discount rate that reflects only the business risks of a project and abstracts from the
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