Formulas & Equations

An investor sells 1 ABC Jan 50 call at 2 and sells 1 ABC Jan 50 put at 3. What is the investor's maximum loss?

Unlimited loss on the short call, $4,500 loss on the short put. Losses occur if the stock rises or falls dramatically.

An investor sells 1 ABC Mar 30 call at 7 and buys 1 ABC Mar 40 call at 3. What is the investor's maximum loss?

$600. If the stock rises, the investor could lose starting from the breakeven of 34 up to 40.

True or False: When prices are rising, switching from a LIFO to FIFO inventory method will increase EBITDA.

True

Price/Earnings (P/E) Ratio (also called the earnings multiple)

Stock's market price ÷ EPS

True or False: Maximum gains and maximum losses could be unlimited with vertical spreads.

False. Spreads limit both gains and losses. Remember, net premium is the loss for the buyer and the gain for the seller.

An investor sells short 100 shares of MNO at 35 and sells 1 MNO Jan 30 put at 3. What's the investor's maximum loss?

Unlimited. The investor has no protection if the stock continues to rise above the 38 breakeven.

True or False: When prices are rising, switching from a FIFO to LIFO inventory method will reduce COGS?

False. Switching from FIFO to LIFO inventory method will increase COGS.

What is the formula for determining a stock's price to earnings (P/E) ratio?

Current market price ÷ earnings per share (EPS)

What is the formula for calculating return on equity (ROE)?

Earnings Available to Common ÷ Average Common Stockholders' Equity

True or False: In a period of rising prices, the FIFO inventory method would create a greater profit than using LIFO.

True

An investor owns 1 ABC May 60 Call. If ABC announces a 3:2 split, what are the terms of the investor's contract now?

1 ABC May 40 Call (150 sh. contract). Shares increase to 150 (100 x 3/2) and strike price decreases to $40 ($60 x 2/3).

If the price of a stock falls while its earnings remain the same, what happens to its P/E ratio?

The P/E ratio will fall.

An investor holds 1 XYZ Jan 80 Put at 5. Later at expiration, if XYZ has held at 80, would there be a gain or a loss?

A loss of $500, since the option expires at-the-money

Identify the following formula: Annual dividend ÷ EPS

Dividend payout ratio

If the Hi-Tech Fund has a NAV of $4.25 and a POP of $4.50, what is its sales charge percentage?

The formula is (POP - NAV) divided by POP ($4.50 - $4.25 = $.25 ÷ $4.50 = 5.5%).

Mary bought 100 shares of GMG at 40 and on the same day buys 1 GMG Apr 40 put at 3. What is Mary's basis in the stock?

40 + 3 = 43 (The cost of the stock plus the cost of the option)

The formula for finding conversion ratio on convertible preferred stock is: ÷

The formula for finding conversion ratio is: Par ÷ Conversion Price (par for preferred is $100)

An investor buys an OEX May 475 call at 10. What is his maximum loss?

The premium of $1,000 (the value of 10 x $100)

How is buying power calculated?

SMA divided by Reg T of 50% (just remember SMA x 2)

An investor purchases 1 XRX May 60 call at 6 and writes 1 XRX May 70 call at 2. What is the investor's breakeven point?

60 + 4 = 64 (always between strikes). For call spreads, the net premium is added to the lower strike (CALL UP).

What is the formula for calculating the Debt-to-Equity Ratio?

Total Debt ÷ Total Equity

What is the formula for calculating an individual's personal discretionary income?

Income - Expenses = Discretionary Income

Buy 1 ABC Dec 70 Call at 4. When ABC rises to 80, the call is exercised and the stock is immediately sold. Result?

A $600 profit since the investor is bullish and the stock rose 6 points above the breakeven point of 74.

An investor buys 1 XYZ Dec 70 call at 4 and buys 1 XYZ Dec 70 put at 4. What are the breakeven points for the investor?

70 + 8 = 78 and 70 - 8 = 62. The combined premium of 8 is added to 70 (CALL UP) and subtracted from 70 (PUT DOWN).

An investor holds 1 XYZ Jan 80 Put at 5. What is her maximum loss?

The premium of $500.

What is the dollar price of a T-bond with a bid of 98-24 and a par value of $100?

98 and 24/32. Convert fraction into a decimal 24 ÷ 32 = .75. Now multiply $100 by 98.75% = $98.75.

To find a stock's current yield, the formula is: ÷

To find a stock's current yield, the formula is: Annual Dividend ÷ Current Market Price

Mark sold an 80 put at 7 and was later exercised against. What is Mark's cost basis?

80 - 7 = 73 (strike price minus the premium)

If the Green Fund has a NAV of $12.70 and a sales charge of 5.5%, what is the POP?

The formula is NAV ÷ (100% - Sales Charge %). $12.70 ÷ 94.5% = $13.44.

For inventory purposes, what is the benefit of using LIFO versus FIFO during an inflationary period?

LIFO would create lower earnings; therefore, a lower tax expense.

An investor buys 100 shares of RST at 30 and sells 1 RST Oct 35 call at 2. What is the investor's breakeven point?

30 - 2 = 28 (cost of the stock - the premium received)

A client buys stock on margin and makes no cash deposit because he uses SMA. How are the account balances affected?

LMV and Debit both increase by the full purchase price; no change is made to equity.

Jim is short 1 MNO Aug 40 Put at 4.50. What is Jim's maximum gain?

The premium of $450

What is the margin requirement when buying options?

100% of the premium

What is the formula for the P/E ratio?

Price ÷ EPS (Earnings Per Share)

What is the method to calculate the number of shares that can be purchased through a rights offering?

of rights received ÷ # of rights needed to buy each additional share

The total takedown is made up of + _.

The total takedown is made up of Additional takedown + Sales concession.

An investor buys an OEX May 475 call at 10. What is his breakeven point?

475 + 10 = 485 (strike price plus the premium or CALL UP)

An investor sells 1 ABC Jan 50 call at 2 and sells 1 ABC Jan 50 put at 3. What is the investor's maximum gain?

$500. If ABC stays at 50, both options expire and $500 is made. Remember, sellers cannot make more than the premium.

Marty buys 1 ABC May 55 Call at 4. Later, if ABC is at 51 and the option expires, what is Marty's gain or loss?

Marty has a loss of the $400 premium.

What does one basis point represent as a percentage?

0.01%

An investor buys an OEX May 475 call at 10. What is his maximum gain?

Unlimited

If $25,000 is invested in an inverse ETF, what is the value if the market drops 10% on day 1, then rises 10% on day 2?

Day 1: $25,000 x 1.10 = $27,500 and Day 2: $27,500 x .90 = $24,750

Existing account: LMV $40,000, Debit $10,000, Equity $30,000, SMA $10,000. If SMA is withdrawn, what are the balances?

LMV $40,000 - Debit $20,000 = Equity $20,000 and SMA is $0

What is the ROE formula?

ROE = Earnings Available to Common Shareholders ÷ Average Common Equity

Julio bought a 75 call at 5 and later exercised the option. What is Julio's cost basis?

75 + 5 = 80 (strike price plus the premium)

Consider the following: ABC Sep 45 Put at 5 If ABC is trading at 41, how much time value does the option have?

$1.00 or 1 point

Holden buys 1 STC 65 Call at 3. Later STC rises to 72 and the call is liquidated at 8.50. Is there a gain or loss?

Gain of $550 (determined by the difference between the $300 paid for the option and the $850 received on the sale).

Calculate the combined equity in the following account: LMV $24,000, Debit $10,000, Credit $18,000, SMV $9,000

(24,000 + 18,000 - 10,000 - 9,000) = $23,000

True or False: When prices are rising, switching from a LIFO to FIFO inventory method will reduce EBITDA.

False

Define earnings before interest and taxes (EBIT).

Operating income (adjusted for other income (or expenses) that is not generated by normal operations

Sandra buys 1 ABC Dec 70 Call at 4. Later at expiration, if ABC has fallen to 67, would Sandra have a gain or a loss?

A $400 loss of the premium.

Eric sold a 50 call at 6 and was later exercised against. Eric would have sales proceeds of how much?

$5,000 + $600 = $5,600 or 56 (strike price plus the premium)

What are some examples of odd splits?

3:2, 5:4, 12:5

An investors sells 1 BBO Jan 70 call at 4 and sells 1 BBO Jan 65 put at 2. What is the investor's maximum gain?

$600. If BBO remains between 70 and 65, both options expire and the seller makes the $600 total premium.

What formula can be used to determine how high the SMV can rise to be at the minimum maintenance requirement?

Credit Balance x 10/13

What happens if a bond is convertible at $20 (ratio is 50 shares) and the company issues a 10% stock dividend?

Conversion ratio increases to 55 shares (50 x 10% = extra 5) and the new conversion price would be $18.18 ($1,000 ÷ 55).

True or False: When calculating book value, exclude preferred stock.

True

If asked to determine basis or sales proceeds on an exercised call, remember to .

If asked to determine basis or sales proceeds on an exercised call, remember to CALL UP (strike price plus the premium).

ABC = $50. ABC's bond is convertible at $40 and callable at 105. Is the call or conversion and sale more profitable?

Conversion and sale equals $1,250 (25 shares x $50), while the call only provides $1,050.

How will the sale of securities from an account affect the account balances?

LMV and Debit decrease by the sales proceeds, Equity stays the same, and SMA increases by 50% of the sales proceeds.

A bond with an 8% coupon would pay how much interest per year?

$80.00. Par x Rate ($1,000 x 8%)

Long 1 XYZ Jan 80 Put at 5. Later XYZ falls to 68, and the put is liquidated at its then premium of 12.50. Result?

A $750 gain. The investor originally paid $500, but then received $1,250, netting a $750 gain.

An investor holds 1 XYZ Jan 80 Put at 5. What is her maximum gain?

$7,500 (strike price minus premium)

What is the difference between the current ratio and the quick asset ratio?

The quick asset ratio is more stringent since it excludes inventory from the current assets.

A client with $3,000 of SMA has buying power of $.

A client with $3,000 of SMA has buying power of $6,000 (the SMA balance x 2).

Consider the following: STC May 60 Call at 3 If STC is trading at 61, how much time value does the option have?

$2.00 or 2 points

How can an even split be identified?

Any split to 1 (e.g., 2:1, 3:1, 4:1, 5:1)

An investor holds 1 XYZ January 80 Put at 5. What is her breakeven point?

80 - 5 = 75 (strike price minus premium or PUT DOWN)

An investor sells short 100 shares of MNO at 35 and sells 1 MNO Jan 30 put at 3. What is the investor's maximum gain?

$800. If stock falls and the put is exercised, the short stock is covered at 30 ($500 gain) plus premium ($300 gain).

An investor sells 1 RST May 95 put at 8 and buys 1 RST May 80 put at 1. What is the investor's maximum gain?

The net premium of $700. Remember, sellers cannot make more than the premium.

If given a stock's P/E ratio and market price from a stock table, how is EPS calculated?

Market price ÷ P/E ratio

A bond convertible at $50 is trading at $1,200. For parity, where should the stock be trading?

Conv. ratio = $1,000 ÷ $50 = 20 sh. The stock needs to trade at $60 to be at parity with the bond ($1,200 ÷ 20 = $60).

An investor owns 1 ABC May 60 Call. If ABC declares a 25% stock dividend, what is the investor's new position?

1 ABC May 48 Call. The call is for 125 shares (100 x 25% = extra 25). Then, $6,000 (total value) ÷ 125 sh. = $48.

If earnings are falling while the price of the stock remains the same, what happens to its P/E ratio?

The P/E ratio will rise.

An investor buys 1 ABC Mar 30 call at 7 and sells 1 ABC Mar 40 call at 3. What is the investor's maximum loss?

The net premium of $400. Remember, buyers cannot lose more than the premium.

Sales charge is always expressed as a percentage of the .

Sales charge is always expressed as a percentage of the POP (public offering price).

An investor is long 1 DEF Apr 35 put at 3 and short 1 DEF Apr 30 put at 1. What is the investor's maximum loss?

The net premium of $200. Remember, buyers cannot lose more than the premium.

Corporate and municipal bonds are quoted in 8ths, while T-Notes and T-Bonds are quoted in .

Corporate and municipal bonds are quoted in 8ths, while T-Notes and T-Bonds are quoted in 32nds.

By how much is the following account restricted? LMV $40,000, Debit $25,000, Equity $15,000

Restricted by $5,000. The equity should be $20,000 (50% of $40,000), but there is only $15,000.

Mack, in the 35% tax bracket, is earning 5.4% on a tax-free municipal bond. What is his taxable equivalent yield?

The formula is: Tax-Free Yield ÷ (100% - Tax Bracket %). 5.4% ÷ 65% = 8.3%

The formula for finding conversion ratio is: ÷

The formula for finding conversion ratio is: Par ÷ Conversion Price (par for a bond is $1,000)

An investor buys 1 ABC Mar 30 call at 7 and sells 1 ABC Mar 40 call at 3. What is the investor's maximum gain?

$600. If the stock rises, the investor could profit starting from the breakeven of 34 up to 40.

What is the formula for calculating the P/E ratio?

P/E = Market Price of Common Stock ÷ Earnings per Share (EPS)

How is book value per share calculated?

Shareholders' equity ÷ number of shares outstanding

What is the formula for calculating a bond's current yield?

Annual Interest ÷ Current Market Price

An investor buys 1 XYZ Dec 70 call at 4 and buys 1 XYZ Dec 70 put at 4. What is the investor's maximum gain?

Unlimited gain on the long call, $6,200 gain on the long put. Gains occur if the stock rises or falls dramatically.

Ann invests $15,000 in a non-qualified annuity. At age 64, she withdraws all $22,000. What's Ann's basis; what's taxed?

Her basis is $15,000 since the annuity is funded after-tax and the $7,000 of earnings would be taxed as ordinary income.

Jean bought an 80 put at 7 and later exercised the contract. Jean would have sales proceeds of how much?

$8,000 - $700 = $7,300 or 73 (strike price minus the premium)

If $25,000 is invested in an inverse ETF, what is the value if the market rises by 5% on day 1, then drops 10% on day 2?

Day 1: $25,000 x .95 = $23,750 and Day 2: $23,750 x 1.10 = $26,125

$9 million gross revenue, $3 million oper./maint. expenses, and $2 million debt service. Debt service coverage ratio?

($9 million - $3 million) ÷ $2 million = 3:1 coverage.

Any amount of equity greater than 50% is called _.

Any amount of equity greater than 50% is called excess equity.

Joe sells XYZ and claims a 5-point loss, but triggers the wash sale by repurchasing XYZ at $40. Joe's cost basis is:

$40 + 5 point loss = $45 (The disallowed loss is added to the new purchase.)

If the price of a stock rises while its earnings remain the same, what happens to its P/E ratio?

The P/E ratio will rise.

An investor sells 1 RST May 95 put at 8 and buys 1 RST May 80 put at 1. What is the investor's breakeven point?

95 - 7 = 88 (always between strikes). For put spreads, the net premium is subtracted from the higher strike (PUT DOWN).

What is the tax result for a LEAP that was purchased at 6 and two years later sold at 12?

A long-term capital gain of $600. Remember, a gain on an asset held greater than one year is long-term.

Joan invests $15,000 in a qualified annuity. At age 64, she withdraws all $22,000. What's Joan's basis; what's taxed?

Her basis is zero, since the annuity is qualified (funded pre-tax) and the entire $22,000 is taxed as ordinary income.

An investor buys 100 shares of IBM at 91 and also 1 IBM Nov 90 put at 2. What is the investor's maximum gain?

Unlimited, since the stock's upside is infinite

True or False: Depreciation is a source of cash on the Cash Flow Statement.

True

To calculate the POP for a mutual fund, the formula is: _ ÷ (_ - ___)

To calculate the POP for a mutual fund, the formula is: NAV ÷ (100% - Sales Charge %)