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JavaScript seems to be disabled in your browser. For the best experience on our site, be sure to turn on Javascript in your browser. Microsoft PowerPoint Template and Background with taking a risk in the stock market. Presenting risk reward matrix ppt presentation. This is a risk reward matrix ppt presentation. This is four stage process. The stages in this process are risk reward matrix, investment reward, investment risk, high, med, low.

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When interest rates decline, interest payments on bonds also decrease. Instead of making coupon payments to the investor, some bonds reinvest the coupon into the bond, so it grows at a stated compound interest rate. When a bond has a longer maturity period, the interest on interest significantly increases the total return and might be the only method of realizing an annualized holding period return equal to the coupon rate.

Calculating reinvested interest depends on the reinvested interest rate. Portfolio Management. Fixed Income Essentials. Interest Rates. Certificate of Deposits CDs. Your Money. Personal Finance. Your Practice. Popular Courses. What Is a Reinvestment Rate? Key Takeaways The reinvestment rate is the return an investor expects to make after reinvesting the cash flows earned from a previous investment. The reinvestment rate is expressed as a percentage and represents the amount of interest that can be earned on a fixed-income investment.

Reinvestment rates can be negatively affected by interest rate risk, which is the potential for investment losses resulting from changes in interest rates. Reinvestment rates can also be impacted by reinvestment risk, which is the potential the investor will be unable to reinvest cash flows at a rate comparable to their current rate of return.

Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. A cushion bond is an investment that offers a rate of return that is above prevailing market interest rates in order to alleviate interest rate risk.

How a Call Provision Benefits Investors and Companies A call provision is a provision on a bond or other fixed-income instrument that allows the issuer to repurchase and retire its bonds. How the Barbell Investment Strategy Works The barbell is an investment strategy often used in fixed-income portfolios, with the portfolio split between long-term bonds and short-term bonds. Step-Up Bonds Help Investors Keep up With Rising Interest Rates A step-up bond is a bond that pays an initial interest rate but has a feature whereby set rate increases occur at periodic intervals.

Bond A bond is a fixed income investment in which an investor loans money to an entity corporate or governmental that borrows the funds for a defined period of time at a fixed interest rate. Both measures should be forward looking and the return on capital should represent the expected return on capital on future investments.

In the rest of this section, you consider how best to estimate the reinvestment rate and the return on capital. The reinvestment rate measures how much a firm is plowing back to generate future growth. The reinvestment rate is often measured using the most recent financial statements for the firm.

Although this is a good place to start, it is not necessarily the best estimate of the future reinvestment rate. For these firms, looking at an average reinvestment rate over time may be a better measure of the future. In addition, as firms grow and mature, their reinvestment needs and rates tend to decrease. For firms that have expanded significantly over the last few years, the historical reinvestment rate is likely to be higher than the expected future reinvestment rate.

For these firms, industry averages for reinvestment rates may provide a better indication of the future than using numbers from the past. The return on capital is often based upon the firm's return on existing investments, where the book value of capital is assumed to measure the capital invested in these investments. Implicitly, you assume that the current accounting return on capital is a good measure of the true returns earned on existing investments and that this return is a good proxy for returns that will be made on future investments.

This assumption, of course, is open to question for the following reasons. When the book value understates the capital invested, the return on capital will be overstated; when book value overstates the capital invested, the return on capital will be understated. This problem is exacerbated if the book value of capital is not adjusted to reflect the value of the research asset or the capital value of operating leases.

All the problems in using unadjusted operating income described in Chapter 4 continue to apply. If the current return on capital for a firm is significantly higher than the industry average, the forecasted return on capital should be set lower than the current return to reflect the erosion that is likely to occur as competition responds. Finally, any firm that earns a return on capital greater than its cost of capital is earning an excess return.

High excess returns locked in for very long periods imply that this firm has a permanent competitive advantage. The reinvestment rate for a firm can be negative if its depreciation exceeds its capital expenditures or if the working capital declines substantially during the course of the year. For most firms, this negative reinvestment rate will be a temporary phenomenon reflecting lumpy capital expenditures or volatile working capital.

This is what we did for Embraer in the Illustration above. For some firms, though, the negative reinvestment rate may be a reflection of the policies of the firms and how we deal with it will depend upon why the firm is embarking on this path:. If this is the case, we should not use the negative reinvestment rate in forecasts and estimate growth based upon improvements in return on capital.

Once the firm has reached the point where it is efficiently using its resources, though, we should change the reinvestment rate to reflect industry averages. In this case, the expected growth should be estimated using the negative reinvestment rate. Not surprisingly, this will lead to a negative expected growth rate and declining earnings over time. The analysis in the previous section is based upon the assumption that the return on capital remains stable over time.

If the return on capital changes over time, the expected growth rate for the firm will have a second component, which will increase the growth rate if the return on capital increases and decrease the growth rate if the return on capital decreases. So far, you have looked at the return on capital as the measure that determines return.

In reality, however, there are two measures of returns on capital. One is the return earned by firm collectively on all of its investments, which you define as the average return on capital. The other is the return earned by a firm on just the new investments it makes in a year, which is the marginal return on capital. Changes in the marginal return on capital do not create a second-order effect and the value of the firm is a product of the marginal return on capital and the reinvestment rate.

Changes in the average return on capital, however, will result in the additional impact on growth chronicled above. What types of firms are likely to see their return on capital change over time? One category would include firms with poor returns on capital that improve their operating efficiency and margins, and consequently their return on capital. In these firms, the expected growth rate will be much higher than the product of the reinvestment rate and the return on capital.

In fact, since the return on capital on these firms is usually low before the turn-around, small changes in the return on capital translate into big changes in the growth rate. The other category would include firms that have very high returns on capital on their existing investments but are likely to see these returns slip as competition enters the business, not only on new investments but also on existing investments. The third and most difficult scenario for estimating growth is when a firm is losing money and has a negative return on capital.

Since the firm is losing money, the reinvestment rate is also likely to be negative. To estimate growth in these firms, you have to move up the income statement and first project growth in revenues. If the expected margin in future years is positive, the expected operating income will also turn positive, allowing us to apply traditional valuation approaches in valuing these firms.

You also estimate how much the firm has to reinvest to generate revenue growth, by linking revenues to the capital invested in the firm. Many high growth firms, while reporting losses, also show large increases in revenues from period to period. The first step in forecasting cash flows is forecasting revenues in future years, usually by forecasting a growth rate in revenues each period.

In making these estimates, there are five points to keep in mind. Firms can post higher growth rates in revenues by adopting more aggressive pricing strategies but the higher revenue growth will then be accompanied by lower margins. Before considering how best to estimate the operating margins, let us begin with an assessment of where many high growth firms, early in the life cycle, stand when the valuation begins.

They usually have low revenues and negative operating margins. If revenue growth translates low revenues into high revenues and operating margins stay negative, these firms will not only be worth nothing but are unlikely to survive. For firms to be valuable, the higher revenues eventually have to deliver positive earnings.

In a valuation model, this translates into positive operating margins in the future. A key input in valuing a high growth firm then is the operating margin you would expect it to have as it matures. In estimating this margin, you should begin by looking at the business that the firm is in.

While many new firms claim to be pioneers in their businesses and some believe that they have no competitors, it is more likely that they are the first to find a new way of delivering a product or service that was delivered through other channels before. Thus, Amazon might have been one of the first firms to sell books online, but Barnes and Noble and Borders preceded them as book retailers.

In fact, one can consider online retailers as logical successors to catalog retailers such as L. Bean or Lillian Vernon. Similarly, Yahoo! Using the average operating margin of competitors in the business may strike some as conservative. After all, they would point out, Amazon can hold less inventory than Borders and does not have the burden of carrying the operating leases that Barnes and Noble does on its stores and should, therefore, be more efficient about generating its revenues and subsequently earnings.

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This ratio allows analysts to understand the degree to which net income is put back into the business. It can be indicative of its long-term goals and strategies. When more cash is put back in the business, it can show that the company is expecting significant growth in its operations.

This is usually typical for young companies. On the other hand, a low cash reinvestment is a sign of maturity, stability in a company that is not expecting rapid growth or expansion, and this is always common in large and well-established companies. A consistently high or increasing cash reinvestment ratio is desired as it means that the business has unexploited potentials, and it is committed to growth in the future. To gain a more realistic picture of how the company is performing, its cash reinvestment ratio can be compared against its peer group in the same industry.

Be aware that the cash flow amount should be adjusted for dividends. Companies using this ratio should factor out the impact of the sale of any fixed assets sold during the measurement period. You can calculate cash flow adjusted for dividends by adding up non-cash expenses, such as depreciation and amortization, and the net income of the company.

Then subtract non-cash sales and dividends:. Companies using this ratio must pay attention to two situations in particular. The first involves fixed asset sales, while the second involves working capital elimination. To gain a more realistic picture of how the company is performing, this ratio can be compared against its other companies within the same industry.

Usually, a higher ratio is preferred as it indicates a strong likelihood of significant growth in future. As an experienced investor, he first decided to find out if the company is committed to growth. He extracted the information below. Find their cash reinvestment ratio so he can make a final decision.

For this equation, the cash reinvestment ratio is 1. So far in this section, we have operated on the assumption that the return on equity remains unchanged over time. If we relax this assumption, we introduce a new component to growth — the effect of changing return on equity on existing investment over time. This additional growth can be written as a function of the change in the return on equity.

This will be in addition to the fundamental growth rate computed as the product of the return on equity in period t and the retention ratio. While increasing return on equity will generate a spurt in the growth rate in the period of the improvement, a decline in the return on equity will create a more than proportional drop in the growth rate in the period of the decline. It is worth differentiating at this point between returns on equity on new investments and returns on equity on existing investments.

The additional growth that we are estimating above comes not from improving returns on new investments but by changing the return on existing investments. Just as equity income growth is determined by the equity reinvested back into the business and the return made on that equity investment, you can relate growth in operating income to total reinvestment made into the firm and the return earned on capital invested. You will consider three separate scenarios, and examine how to estimate growth in each, in this section.

The first is when a firm is earning a high return on capital that it expects to sustain over time. The second is when a firm is earning a positive return on capital that is expected to increase over time. The third is the most general scenario, where a firm expects operating margins to change over time, sometimes from negative values to positive levels. When a firm has a stable return on capital, its expected growth in operating income is a product of the reinvestment rate, i.

In making these estimates, you use the adjusted operating income and reinvestment values that you computed in Chapter 4. Both measures should be forward looking and the return on capital should represent the expected return on capital on future investments. In the rest of this section, you consider how best to estimate the reinvestment rate and the return on capital.

The reinvestment rate measures how much a firm is plowing back to generate future growth. The reinvestment rate is often measured using the most recent financial statements for the firm. Although this is a good place to start, it is not necessarily the best estimate of the future reinvestment rate. For these firms, looking at an average reinvestment rate over time may be a better measure of the future.

In addition, as firms grow and mature, their reinvestment needs and rates tend to decrease. For firms that have expanded significantly over the last few years, the historical reinvestment rate is likely to be higher than the expected future reinvestment rate. For these firms, industry averages for reinvestment rates may provide a better indication of the future than using numbers from the past.

The return on capital is often based upon the firm's return on existing investments, where the book value of capital is assumed to measure the capital invested in these investments. Implicitly, you assume that the current accounting return on capital is a good measure of the true returns earned on existing investments and that this return is a good proxy for returns that will be made on future investments.

This assumption, of course, is open to question for the following reasons. When the book value understates the capital invested, the return on capital will be overstated; when book value overstates the capital invested, the return on capital will be understated. This problem is exacerbated if the book value of capital is not adjusted to reflect the value of the research asset or the capital value of operating leases. All the problems in using unadjusted operating income described in Chapter 4 continue to apply.

If the current return on capital for a firm is significantly higher than the industry average, the forecasted return on capital should be set lower than the current return to reflect the erosion that is likely to occur as competition responds.

Finally, any firm that earns a return on capital greater than its cost of capital is earning an excess return. High excess returns locked in for very long periods imply that this firm has a permanent competitive advantage. The reinvestment rate for a firm can be negative if its depreciation exceeds its capital expenditures or if the working capital declines substantially during the course of the year.

For most firms, this negative reinvestment rate will be a temporary phenomenon reflecting lumpy capital expenditures or volatile working capital. This is what we did for Embraer in the Illustration above. For some firms, though, the negative reinvestment rate may be a reflection of the policies of the firms and how we deal with it will depend upon why the firm is embarking on this path:.

If this is the case, we should not use the negative reinvestment rate in forecasts and estimate growth based upon improvements in return on capital. Once the firm has reached the point where it is efficiently using its resources, though, we should change the reinvestment rate to reflect industry averages.

In this case, the expected growth should be estimated using the negative reinvestment rate. Not surprisingly, this will lead to a negative expected growth rate and declining earnings over time. The analysis in the previous section is based upon the assumption that the return on capital remains stable over time. If the return on capital changes over time, the expected growth rate for the firm will have a second component, which will increase the growth rate if the return on capital increases and decrease the growth rate if the return on capital decreases.

So far, you have looked at the return on capital as the measure that determines return. In reality, however, there are two measures of returns on capital. One is the return earned by firm collectively on all of its investments, which you define as the average return on capital. The other is the return earned by a firm on just the new investments it makes in a year, which is the marginal return on capital. Changes in the marginal return on capital do not create a second-order effect and the value of the firm is a product of the marginal return on capital and the reinvestment rate.

Changes in the average return on capital, however, will result in the additional impact on growth chronicled above. What types of firms are likely to see their return on capital change over time? One category would include firms with poor returns on capital that improve their operating efficiency and margins, and consequently their return on capital. In these firms, the expected growth rate will be much higher than the product of the reinvestment rate and the return on capital.

In fact, since the return on capital on these firms is usually low before the turn-around, small changes in the return on capital translate into big changes in the growth rate. The other category would include firms that have very high returns on capital on their existing investments but are likely to see these returns slip as competition enters the business, not only on new investments but also on existing investments.

The third and most difficult scenario for estimating growth is when a firm is losing money and has a negative return on capital. Since the firm is losing money, the reinvestment rate is also likely to be negative. To estimate growth in these firms, you have to move up the income statement and first project growth in revenues. If the expected margin in future years is positive, the expected operating income will also turn positive, allowing us to apply traditional valuation approaches in valuing these firms.

You also estimate how much the firm has to reinvest to generate revenue growth, by linking revenues to the capital invested in the firm. Many high growth firms, while reporting losses, also show large increases in revenues from period to period. The first step in forecasting cash flows is forecasting revenues in future years, usually by forecasting a growth rate in revenues each period. In making these estimates, there are five points to keep in mind. Firms can post higher growth rates in revenues by adopting more aggressive pricing strategies but the higher revenue growth will then be accompanied by lower margins.

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With both historical and analyst estimates, growth is an exogenous variable that affects value but is divorced from the operating details of the firm.

Perfect timing catterton investment The Fundamental Determinants of Growth With both historical and analyst estimates, growth is an exogenous variable that affects value but is divorced from the operating details of reinvestment rate equation laser firm. Firms that have higher retention ratios and earn higher returns on muvoni investment holdings abu should have much higher growth rates in earnings per share than firms that do not share these characteristics. In reality, however, there are two measures of returns on capital. A complete analysis of spectral shift during direct modulation found that the refractive index of the active region varies proportionally to carrier density and hence the wavelength varies proportionally to injected current. Since the firm is losing money, the reinvestment rate is also likely to be negative. They usually have low revenues and negative operating margins.
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Dalp investments llc B 14 5, doi The third and most difficult scenario for estimating growth is when a firm is losing money and has a negative return on capital. The derivation is simple [1]. You also estimate how much the firm has to reinvest to generate revenue growth, by linking revenues to the capital invested in the firm. These sharing buttons are implemented in a privacy-friendly way!
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Reinvestment rate equation laser RP Photonics Marketing. In the rest of this section, you consider how best to estimate the reinvestment rate and the return on capital. Finally, any firm that earns a return on capital greater than its cost of capital is earning an excess return. In many situations, it is possible and convenient to derive equations for spatially averaged population densities. Portfolio Management. Reinvestment rates are of particular concern to risk-averse investors who invest in Treasury bills T-billsTreasury bonds T-bondsmunicipal bonds, Certificates of Deposit CDspreferred stocks with a stated dividend rate, and other fixed-income investments.

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