Equity Financing Module 8

These flashcards cover key concepts related to equity financing and financial ratios relevant to stockholders' equity.

Return on Equity (ROE)

A measure of the amount of profit earned per dollar of invested capital.

Earnings per Share (EPS)

Measures the amount of net income associated with each share of common stock.

Price Earnings Ratio (P/E Ratio)

Measures investors’ expectations regarding the growth potential and earnings stability of a company.

How is Return on Equity (ROE) calculated?

Net Income divided by Average Equity.

What does a higher Return on Equity (ROE) indicate?

It indicates that a company is generating more profit per dollar of equity invested.

What is the formula for Earnings per Share (EPS)?

Net Income minus Preferred Stock Dividends divided by the number of common shares outstanding.

What information does Earnings per Share (EPS) provide to a stockholder?

It indicates how much of a company's net income is attributed to the individual's ownership interest.

What does the Price Earnings (P/E) Ratio measure?

The relationship between the market value of a company and its current earnings.

Why is a higher P/E Ratio considered better?

Because it is associated with firms that are predicted to have strong growth in the future.

How is the Price Earnings (P/E) Ratio calculated?

Market Price per Share of Stock divided by Earnings per Share.