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EPS, PE & Return on Common Stockholder's Equity - YouTube
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tada finally welcome to what I hope is
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less pink ass and corporations my goal
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my goal is to explore how we use ratios
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to evaluate business performance and
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stockholders equity section the balance
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sheet then that and every topic we've
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studied so far we're going to continue
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that the three ratios were going to
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learn in this chapter are the earnings
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per share ratio the price earnings ratio
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and the rate of return comstock ratio
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the first I digress yo call from chapter
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1 and 11 10 we make financial statements
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so we can pass some external users and
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external users use them in the
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decision-making process do they want to
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invest in this or not during the course
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of 11 20 so far we learned few ratios in
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chapter 10 we learned asset turnover
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chapter 12 we didn't learn any that were
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particular partnerships and in chapter
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13 I'm going to learn earnings per share
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ratio the pies price earnings ratio and
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the return on common stock there's a
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problem on the final where these ratios
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are calculated and as if students losing
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way too many points a really simple
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calculation so I'm going to make it
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point to draw your attention as we move
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through where these ratios are and then
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when we get to financial analysis
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chapter they will be more familiar to
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you and they're all listed on the same
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page our focus in this pencast is going
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to be on the chapter 13 ratios I
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shouldn't use Chapter II shouldn't use
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chapter references i should use names
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chapters chains so let's take that off
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and use ratios to evaluate corporations
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so first time I fell into that trap is
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right now and I'm not going to do that
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so we have planned assets and
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corporation ratios earnings per share
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price earnings ratios and rate of return
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I'm going to start with the earnings per
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share ratio always called eps and I'll
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tell you what this is the most widely
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used ratio to evaluate how business is
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doing what it does is it says let's take
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net income and subtract the amount that
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belongs to preferred stockholders and
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that would be their preferred stock
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dividends and divide that by the
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weighted average number of shares of
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common stock outstanding and what that
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gives you is the earnings per share the
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net income per share by stock so it's a
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per share about earnings per share the
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common stockholders the residual owners
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of our business they're the ones that
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will always get what's left let's talk a
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little bit about this formula first of
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all net income net income comes right
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from the income statement and there are
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no changes made to its Justin Eddington
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and from that we subtract preferred
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stock dividends because that is the
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number that is the amount of preferred
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stock or that is the amount of net
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income that belongs to our preferred
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stockholders everything else is
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available for the common stockholders
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well since you are using an income
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statement number on top and a balance
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sheet number on the bottom whenever you
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see that line up we almost always do an
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average for purposes of this course
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we're going to take our beginning number
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of shares of common stock plus our
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ending number of shares of common stock
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for the period and divide by two to get
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a weighted average share common stock
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you get a little bit more intense on how
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you calculate that and more advanced
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courses but we're going to leave it
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simple for this introductory course to
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financial accounting let me write down
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some numbers for you and we'll work
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through this here's our facts on our
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income statement for our business it
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showed me earn two hundred thousand
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dollars and our balance sheet we can
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look at the common stock outstanding
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numbers and we see that I beginning
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outstanding number of shares is 50
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thousand and they're ending outstanding
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number of shares is 75,000 what can also
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see on our statement of retained
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earnings that we paid a dividend to
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preferred shareholders in the amount of
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6,000 notice I'm not including the
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common stock meant to see that they
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preferred stockholders taking our
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formula that infamous two hundred
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thousand subtract the dividends declared
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and preferred stock and divide it by the
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weighted average number of shares
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outstanding we started with 50,000 we
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ended with 75 to get an average of that
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we need to divide that by two do a
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little math and get things simpler that
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leaves 194,000 on top / 62,500 shares of
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average stock outstanding now you do the
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math you'll find that that comes out to
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three dollars and ten cents per share
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and I rounded to the nearest dollar
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so my earnings per share for this
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corporation for this period is three
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dollars in ten cents you would want to
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do a trend analysis and see how that
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looks over a period of time within this
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business and you would want to do some
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comparisons with the marketplace and the
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industry and then you could decide if
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you think arms for sure for this
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business show that it were healthy or if
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it were cause for concern helping you
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make your investment decision that's
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move under the price earnings ratio
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price earnings ratio is a great tool to
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help determine how much you should be
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learned to pay for a share of stock it
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also lets investors know about how much
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each dollar that they have the best and
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earned for how much a company makes it's
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a great way to also spot if a company's
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undervalued or overvalued common price
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earnings ratio is somewhere around 10 15
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but it varies by industry let's get a
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handle on the formula the name itself
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tells you how you calculate it you take
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the market price of the stock and divide
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it by its earnings per share as we
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calculated in the last ratio it seems
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like you have to calculate a lot of
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Rachel's it's not really true because
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earnings per share is printed right on
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the face of an income statement so our
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formula is to take market price / earns
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price per share let's get some facts so
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if formulas market price divided by
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earnings per share in our FAQ say how
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stock is on 450 bucks a share my
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earnings per share is three dollars in
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ten cents like we calculated above what
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is our price earnings ratio put me on
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hold calculate it and come on back the
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number is sixteen thousand twelve cents
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but this tells you is set for every
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dollar are stopped and we're paying
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sixteen dollars and twelve cents to
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really know what this means is first of
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all the norms around 14-15 so that seems
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good but I would like to do a trend
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analysis on my business look at this
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ratio over the last five years and I'd
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like to do an industry comparison my
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biggest competitors and decide if I
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think my company's doing well or if this
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ratios showing signs of my company being
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soft oh there's our earnings per share
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ratio and our price earnings ratio let's
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move on to our last ratio and that is a
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rate of return on our common stock it's
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also shortened to be return on equity
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you often see the ratio written like
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that and what it does is it shows the
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relationship between net income that's
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available to our common stockholders
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and how much they have in common equity
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invested in the business let me write
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down the formula first of all remember
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it's for common stockholders and we'll
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take net income from the financial
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statement and subtract from that any
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money that was paid out to the preferred
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shareholders by way of dividends and
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we'll divide that by the average amount
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of province stockholders equity again
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now this one number coming from the
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income statement when number coming from
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the balance sheets of the balance sheet
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being averaged and this will give you a
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percent and this percent tells you how
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much you'd give it what kind of a return
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you're getting on the money you have
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invested in this business let's give you
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some facts and we'll calculate a return
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on equity number here's my fax we have
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net income of 200,000 preferred
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dividends paid of 6,000 how common stock
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at the beginning in the end I preferred
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stock at the beginning of the end I
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retained earnings beginning of the end
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in our total the retained earning or the
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total amount of stuff of our come the
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total of our stockholders equity and is
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applicable to preferred stock is their
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amount of stuff that they owned so I'm
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going to pull that out it says the
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preferred stock about that means the
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common stockholders who are the residual
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owners of the business portion of
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stockholders equity is four hundred
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thousand and five hundred and twenty and
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they wrote all of these numbers down so
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that you can see preferred stock is
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pulled out and this is the amount that
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belongs to the common stockholders let's
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go with our formula net income 200,000
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minus the amount paid to preferred
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stockholders of six thousand divided by
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our average investment in this business
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which is four hundred thousand plus
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520,000 take that and divide that by to
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spring it down to more simple than 194 /
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920 / to that equals 460,000 now we're
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ready to calculate the racial
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it comes out to a whopping 42-point ten
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percent return on our investment I don't
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know about you but that's a heck of a
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lot better than the checking account or
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savings account to me I probably should
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have I stockholders equity section be
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bigger but that's okay in the land of
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textbooks la la la this is definitely a
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positive sign for our business with the
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rate being forty two percent return
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wahoo as you drop your money in and sign
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me up again you would want to do a trend
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analysis on this an industry and market
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comparisons to decide if you feel like
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we're moving in a good direction or not
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so good direction this end is how
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investors can use ratio analysis and
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decision making spend a little time
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making sure you understand the ratios
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for me to chapter and how to calculate
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them it'll pan out being on the final
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and I'll be so much happier when I grade
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it I'm probably the thing I'm happy is
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small twist is this is the end of our
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lovely chap a corporation or voix
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