...Profit margin From Wikipedia, the free encyclopedia Profit margin, net margin, net profit margin or net profit ratio all refer to a measure of profitability. It is calculated by finding the net profit as a percentage of the revenue.[1] \mathrm{Net\ profit\ Margin} = {\mathrm{Net\ Profit}\over\mathrm{Revenue}} where Net Profit = Revenue - Cost profit percentage is calculated with cost price taken as base. Profit margin is calculated with selling price (or revenue) taken as base. Profit margin is the percentage of selling price that turned into profit, where as profit percentage is the percentage of cost price that one gets as profit on top of cost price. So while selling something one should know what percentage of profit will he get on a particular investment so companies calculate profit percentage to check what is ratio of profit on the basis of cost. The profit margin is mostly used for internal comparison Suppose you buy something for $100 and sell it off for $150. cost price = $100 selling price (revenue) = $150 profit = $150 - $100 = $50 profit percentage = 50% (profit as percentage of cost price) profit margin = 33.33% (profit as percentage of selling price or revenue) The profit margin is mostly used for internal comparison. It is difficult to accurately compare the net profit ratio for different entities. Individual businesses' operating and financing arrangements vary so much that different entities are bound to have different levels of expenditure, so...
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...What is the difference between gross margin and contribution margin? Gross Margin is the Gross Profit as a percentage of Net Sales. The calculation of the Gross Profit is: Sales minus Cost of Goods Sold. The Cost of Goods Sold consists of the fixed and variable product costs, but it excludes all of the selling and administrative expenses. Contribution Margin is Net Sales minus the variable product costs and the variable period expenses. The Contribution Margin Ratio is the Contribution Margin as a percentage of Net Sales. Let's illustrate the difference between gross margin and contribution margin with the following information: company had Net Sales of $600,000 during the past year. Its inventory of goods was the same quantity at the beginning and at the end of year. Its Cost of Goods Sold consisted of $120,000 of variable costs and $200,000 of fixed costs. Its selling and administrative expenses were $40,000 of variable and $150,000 of fixed expenses. The company's Gross Margin is: Net Sales of $600,000 minus its Cost of Goods Sold of $320,000 ($120,000 + $200,000) for a Gross Profit of $280,000 ($600,000 - $320,000). The Gross Margin or Gross Profit Percentage is the Gross Profit of $280,000 divided by $600,000, or 46.7%. The company's Contribution Margin is: Net Sales of $600,000 minus the variable product costs of $120,000 and the variable expenses of $40,000 for a Contribution Margin of $440,000. The Contribution Margin Ratio is 73.3% ($440,000 divided by $600...
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...Stephen J. Hoch, Xavier Dreze, & Mary E. Purk EDLP, Hi-Lo, and Margin Arithmetic The authors examine the viability of an "everyday low price" (EDLP) strategy in the supermarket grocery industry. in two series of field experiments in 26 product categories conducted in an 86-store grocery chain, they find that a 10% EDLP category price decrease led to a 3% sales volume increase, whereas a 10% Hi-Lo price increase led to a 3% sales decrease. Because consumer demand did not respond much to changes in everyday price, they found large differences in profitability. An EDLP policy reduced profits by 18%. and Hi-Lo pricing increased profits by 15%. in a third study, the authors increase the frequency of shallow price deals in the context of higher everyday prices and find a 3% increase in unit volume and a 4% increase in profit. Finally, they draw a conceptual distinction between "value pricing" at the back door and EDLP pricing at the front door. R etail formats come and go with changes in consumer tastes, lifestyles, and trends in demography and the economy. Recently it is the "everyday low price" (EDLP) format that has experienced rapid growth and media popularity. The prototypical description of an EDLP pricing policy is as follows: The retailer charges a constant, lower everyday price with no temporary price discounts. These constant everyday prices at the EDLP outlet eliminate week-toweek price uncertainty and represent a contrast to the "HiLo" pricing of promotion-oriented...
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...Margin Call J.C. Chandler’s 2011 film Margin Call examines the actions of an investment firm’s key decision makers during the earliest stages of the most recent financial crisis. Chandler does a good job with the characters of this movie he isn’t necessarily looking for a villain in a mess like this nor any lengthy explanations; he’s going deeper than that. He goes more for societal costs of high finance, the power of self-rationalization, and the easy embrace of personal corruption. The movie is filled with business lessons that go beyond the investment world. One theme of the film centers on business ethics and whether personal interest should trump customer/employee investment. Clearly, the decision made by John Tuld and senior management demonstrates that everybody is out for themselves. Personal investors are at the mercy of the individuals and the firms they invest with. The ease with which Tuld makes his decisions is scary to any business ethical viewer. With unqualified statements such as, “its just money” the audience begins to understand that the financial system can be an unfair game. In contrast Peter’s boss, Sam Rogers’ ethical implications of how the company plans to resolve its problems are almost more than he can handle. Sam stumbles upon the issue triggering the crisis, it’s one thing to be shocked at the ramifications of what’s about to unfold. But it doesn’t mean one’s outrage can’t be set aside when personal survival is on the line, an attitude...
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...Profitability Indicator Ratios: Profit Margin Analysis In the income statement, there are four levels of profit or profit margins - gross profit, operating profit, pre-tax profit and net profit. The term "margin" can apply to the absolute number for a given profit level and/or the number as a percentage of net sales/revenues. Profit margin analysis uses the percentage calculation to provide a comprehensive measure of a company's profitability on a historical basis (3-5 years) and in comparison to peer companies and industry benchmarks. Basically, it is the amount of profit (at the gross, operating, pre-tax or net income level) generated by the company as a percent of the sales generated. The objective of margin analysis is to detect consistency or positive/negative trends in a company's earnings. Positive profit margin analysis translates into positive investment quality. To a large degree, it is the quality, and growth, of a company's earnings that drive its stock price. Formulas: |[pic] | |[pic] | |[pic] | |[pic] | Components: |[pic] | |[pic] | |[pic] | |[pic] ...
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...Margin Call Margin call is an independent drama film of a investment bank firm that takes place over a 36 hour period after discovering a huge financial crisis that is about to occur. Each character takes part in a story that shows their emotions and actions of how to handle an economic downturn. In the beginning of the movie, many of the employees are being laid off and that includes Head Risk Manager, Eric Dale. Before he leaves, he hands Junior Risk Analyst, Peter Sullivan, a USB of his project he has been working on and tells him to “be careful”. Peter later continues on the project that Eric Dale hasn’t completed and then reaches a conclusion that is very problemental to the firm and economy. The mortgage-backed securities which they possess are losing value which will be detrimental to the firm. Peter cannot reach Dale so instead contacts, Seth, Junior Risk Analyst, and Will, Head of Trading, to take a look at his outcome. Soon, this problem is discovered and all the head of the company, including Chief Executive Officer, John Tuld, is forced to have a meeting at 3 in the morning to discuss what actions should be taken. They are conflicted on a solution to save the company but need to do whatever it takes. After a discussion, they then reach a conclusion to sell off toxic securities before the news spreads of their worthlessness. The market opens and they are capable of selling the assets at a discounted price even though many clients are suspicious and will...
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...Margin call is an american movie, realizd by JC Chandor in 2011 The story This movie explains how crisis in 2008 happened in a financial institution in New York. The company exists since 137 years with John Tuld as the Chief Executive Officer. The leader of trading operation is Sam Rogers. He is in the company since 34 years. First of all, there is the layoff of Eric Dale, the financial analyst. We can see a comparison with Lehman Brothers when bankers leave the company with a case under arms and the telephone line were cut instantaneously. While Dale is being escorted out, he gives Peter a USB memory stick with a project he had been working on, telling him to "be careful" just as he boards the elevator. During the night, Sullivan finishes Dale's project and discovers that current volatility in the firm's portfolio of Mortgage Backed Securities (MBS) will soon exceed the historical volatility levels of the positions. Because of excessive leverage, if the firm's assets decrease by 25% in value, the firm will suffer a loss greater than its market capitalization. He also discovers that, given the normal length of time that the firm holds such securities, this loss must occur. Sullivan alerts Emerson, who calls floor head Sam Rogers. The employees remain at the firm for a series of meetings with progressively more senior executives, including division head, Jared Cohen, the chief risk management officer, and finally CEO John Tuld. Cohen's plan is for the firm to quickly...
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...Jhocelyn Diaz Serna English 4 10 October 2011 Essay #1 According to Ian Frazier’s “In Praise of Margins” and Nicholas Carr’s “The Shallows”, margins are portrayed as ways in a person’s life that create space free of judgment through nature. The world can be a judgmental place, but margins in nature let people meditate and act the way they uniquely act behind closed doors in seclusion. As time changes, marginal activities, places, and thoughts change as the environment and thought process ages. Regardless of the change, margins never leave a person's life, no matter how big or small. Although some marginal activities are shunned by the world because they are not of the usual norm, nature does not judge and accepts the awkward aspects of a person. Margins through nature are necessary to let people be themselves and for their ideas and acts to develop, nurture, and grow free of judgment. In “In Praise of Margins”, Frazier writes of margins in nature as his childhood escape where he and his friends could go to get away from the world. Although he did not clearly have purpose for this escape, he realized, later on as an adult, that the experience gained from nothing was valuable. For instance, he and his friends would go “explore” the woods all day, a time during which, they would be in privacy. They were in a marginal place free of people who would criticize their acts. Growing up without people telling them what to do during their private time was important in letting them...
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... borrowing the remainder of the purchase price from your broker. The rate on the margin loan is 6% and is paid at the end of the year. A) What is percentage increase in the net worth of your brokerage account if the price of the stock immediately changes to: (i) $18; (ii) $20; (iii) $22? i. -20% ii. 0% iii. 20% B) If the maintenance margin is 30%, how low can ABC’s stock price fall before you get a margin call? 10000/.7=14286/1000 = $14.29/Share C) What is the rate of return on your margined position if the stock is selling after one year at: (i) $18; (ii) $20; (iii) $22? Assume that the stock pays no dividend. i. -26% ii. -6% iii. 14% D) Continue to assume that a year has passed. How low can the price fall before you get a margin call? 10600/.7=15142/1000= $15.14/Share Question 2: Suppose that you sell short 1,000 shares of XYZ stock, currently selling for $20 per share, and give your broker $10,000 to establish your margin account. A) If you earn no interest on the funds in your account, what will be your rate of return after one year if the stock is selling at: (i) $18; (ii) $20; (iii) $22? Assume that the stock pays no dividend. i. 20% ii. 0% iii. -20% B) If the maintenance margin is 30%, how high can the stock price rise before you get a margin call? (30000-1000P)/1000P=.3 P= $23.08/Share C) Redo part (A) and...
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...of XYZ common stock on margin at $50 per share from your broker. If the initial margin is 65%, how much did you borrow from the broker, what is the margin? 2. You purchase 100 shares at $60 per share and margin = 50%. Suppose stock rises to $80/sh (increase of 33%). What is your return? Suppose stock drops to $40/sh (decrease of 33%). What is your return? 3. Investor opens a brokerage account and purchases 300 shares of XYZ at $40 per share. She borrows $4,000 from her broker to help pay for the purchase. The interest rate on the loan is 8%. a. What is the margin in Investors account when she first purchases the stock? b. If the share price falls to $30 per share by the end of the year, what is the remaining margin in her account? c. What is the rate of return on her investment? 4. Suppose you buy 1000 shares of XYZ at $70. You make full use of the initial margin, which is 50%. The maintenance margin is 40%. If the stock price drops to $60, will you receive a margin call? How about 55$? 5. You sell 100 short shares of stock at $60 per share. Initial Margin is 50%. What is your return if the price falls to $50/sh next period? What if it rises to $70? 6. Investor opened an account to short-sell 1,000 shares of XYZ at $40 per share. The initial margin requirement was 50%. (The margin account pays no interest.) A year later, the price of XYZ has risen from $40 to $50, and the stock has paid a dividend of $2 per share. a. What is the remaining margin in the account? b. What...
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...of XYZ common stock on margin at $50 per share from your broker. If the initial margin is 65%, how much did you borrow from the broker, what is the margin? 2. You purchase 100 shares at $60 per share and margin = 50%. Suppose stock rises to $80/sh (increase of 33%). What is your return? Suppose stock drops to $40/sh (decrease of 33%). What is your return? 3. Investor opens a brokerage account and purchases 300 shares of XYZ at $40 per share. She borrows $4,000 from her broker to help pay for the purchase. The interest rate on the loan is 8%. a. What is the margin in Investors account when she first purchases the stock? b. If the share price falls to $30 per share by the end of the year, what is the remaining margin in her account? c. What is the rate of return on her investment? 4. Suppose you buy 1000 shares of XYZ at $70. You make full use of the initial margin, which is 50%. The maintenance margin is 40%. If the stock price drops to $60, will you receive a margin call? How about 55$? 5. You sell 100 short shares of stock at $60 per share. Initial Margin is 50%. What is your return if the price falls to $50/sh next period? What if it rises to $70? 6. Investor opened an account to short-sell 1,000 shares of XYZ at $40 per share. The initial margin requirement was 50%. (The margin account pays no interest.) A year later, the price of XYZ has risen from $40 to $50, and the stock has paid a dividend of $2 per share. a. What is the remaining margin in the account? b. What...
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...FOLLOWING INFORMATION FOR THE NEXT THREE PROBLEMS Jackie has a margin account with a balance of $150,000. If the initial margin deposit is 60 percent and Turtle Industries is currently selling at $50 per share: (a) 1 How many shares of Turtle can Jackie purchase? (b) 2 What is Jackie's profit/loss if Turtle’s price after one year is $40? (d) 3 If the maintenance margin is 25 percent, to what price can Turtle Industries fall before Jackie receives a margin call? USE THE FOLLOWING INFORMATION FOR THE NEXT THREE PROBLEMS Heidi Talbott has a margin account with a balance of $50,000. If the initial margin deposit is 50 percent, and RC Industries is currently selling at $50 per share. (b) 4 How many shares of RC can Heidi buy? (c) 5 What is Heidi’s profit if RC’s price rises to $80? (d) 6 If the maintenance margin is 25 percent, to what price can RC Industries stock price fall before Heidi receives a margin call? USE THE FOLLOWING INFORMATION FOR THE NEXT THREE PROBLEMS Kathy Smith has a margin account with a balance of $60,000. If initial margin requirements are 80 percent, and Jackson Industries is currently selling at $40 per share. (a) 7 How many shares of Jackson can Kathy buy? (a) 8 What is Kathy's profit if Jackson’s price rises to $50? (c) 9 If the maintenance margin is 25 percent, to what price can Jackson Industries fall before Kathy receives a margin call? USE THE FOLLOWING INFORMATION FOR THE NEXT TWO PROBLEMS ...
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...FINA2320/2802DE Fall 2015: Homework #1 Solutions 1. Buying on margin case: (a) The initial value of stock is $75 × 1000 = $75,000. So investor should using invest: Equity in account = $75,000 × Initial Margin = $75,000 × 50% = $37,500 And investor should borrow from the broker: Liability = $75,000 - 37,500 = $37,500 The initial balance sheet looks like this: Assets Liabilities and Owner’s Equity Value of stock $75,000 Loan from broker $37,500 Equity $37,500 (b) (i) If the stock price goes up by 10%, the total value of stock is $75 × (1 + 10%) × 1000 = $82,500 The liability is $37,500 × (1 + 6%) = $39,750. Therefore, the equity in account is $82,500 - $39,750 = $42,750. The balance sheet one year later is: Assets Liabilities and Owner’s Equity Value of stock $82,500 Loan from broker $39,750 Equity $42,750 The dividend payment that the investor received during holding period is $2.5 × 1000 = $2,500. So investor’s holding period return is HPR = ($42,750 - 37,500 + 2,500) / $37,500 = 20.67% (ii) If year-end ex-dividend price of stock does not change, the total value of stock is $75,000. The liability is $39,750. Therefore, the equity in account is $75,000 - $39,750 = $35,250. So investor’s holding period return is HPR = ($35,250 - 37,500 + 2,500) / $37,500 = 0.67% (iii) If year-end ex-dividend price of stock goes down by 10%, the total value of stock is $75 × (1 - 10%) × 1000 = $67,500 The liability is $39,750. Therefore, the equity in account...
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...FIN-672 Securities Analysis & Portfolio Management Professor Michel A. Robe Practice Set #1 and Solutions. What to do with this practice set? To help MBA students prepare for the assignment and the exams, practice sets with solutions will be handed out. These sets contain select worked-out end-of-chapter problems from BKM4 through BKM6. These sets will not be graded, but students are strongly encouraged to try hard to solve them and to use office hours to discuss any problems they may have doing so. One of the best self-tests for a student of his or her command of the material before a case or the exam is whether he or she can handle the questions of the relevant practice sets. The questions on the exam will cover the reading material, and will be very similar to those in the practice sets. Question 1. Suppose you discover a treasure chest of $10 billion in cash. (a) Is this a real or financial asset? (b) Is society any richer for the discovery? (c) Are you wealthier? (d) Can you reconcile your answers to (b) and (c)? Is anyone worse off as a result of the discovery? Question 2. Consider Fig. 1.5 in BKM6. (a) Are these American gold certificates primitive or derivative securities? (b) Is the issue being described a primary or secondary market transaction? Question 3. Suppose that you are an executive of General Motors (GM), and that a large share of your potential income is derived from year-end bonuses that depend on GM’s annual profits. (c) Would the...
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...= (value of stocks - amount borrowed - interest payment - initial investment) / initial investment = 11,000 - 5,000 - 400 - 5,000 / 5,000 = 600 / 5,000 = 0.12 = 12% B) How far can the price drops (immediately) if the maintenance margin is 30%: Value of shares is 200P, equity is 200P - 5,000 so 0.30 60P = (200P - 5,000)/ 200P = 200P - 5,000 140P = 5,000 P = 35.7143 So the price can drop up to 38.57 per share before I get a margin call. 2) Short sell 500 shares and each has a current price of $40 so the value of the stocks for short selling is 500 x 40 = 20,000. 15,000 dollars is given to the broker for the margin account. A) Assume there is no dividend, no interest. The rate of return after a year will be calculated by (Price obtained from short sale - price paid to buy stocks) / initial investment (i) If the price is $44: (20,000 - 22,000) / 15,000 = -13.33% (ii) If the price is $40: (20,000 - 20,000) / 15,000 = 0% (iii) If the price is $36: (20,000 - 18,000) / 15,000 = 13.33% B) If the maintenance margin is 25%, the price can rise up to: Value of the shares is 500P Equity of the shares is 35,000 - 500P 0.25 = (35,000 - 500P) / 500P 125P = 35,000 - 500P 625P = 35,000 P = 56 So the price can go up to 56 dollars before I get a margin call from the broker. C) Suppose that the dividend for each share is $1, so the dividend at year end will be 500 x 1 = 500 dollars. The rate of return in part (A) will be: (Price obtained from short sale - dividend - price paid to...
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