equity

Examples of equity in the following topics:

• Debt-to-Equity Ratio

  • The Debt-to-Equity Ratio is a financial ratio that compares the debt of a company to its equity and is closely related to leveraging.
  • The Debt-to-Equity Ratio is a financial ratio indicating the relative proportion of shareholder's equity and debt used to finance a company's assets, and is calculated as total debt / total equity.
  • Interest payments on debt are tax deductible, while dividends on equity are not.
  • Calculating a company's debt to equity ratio is straight forward, and the debt and equity components can be found on a company's respective balance sheet.
  • For more advanced analysis, financial analysts can calculate a company's debt to equity ratio using market values if both the debt and equity are publicly traded.

• The Statement of Equity

  • The statement of equity explains the changes of the company's equity throughout the reporting period.
  • The statement of equity (and similarly the equity statement, statement of owner's equity for a single proprietorship, statement of partner's equity for a partnership, and statement of retained earnings and stockholders' equity for a corporation) are basic financial statements.
  • These statements explain the changes of the company's equity throughout the reporting period.
  • The statements are expected by generally accepted accounting principles (GAAP) and explain the owners' equity and retained earnings shown on the balance sheet, where: owners' equity = assets − liabilities.
  • Retained earnings are part of the statement of changes in equity.

• Owners' Equity

  • Shareholders' equity is the difference between total assets and total liabilities.
  • Ownership equity may include common stock, preferred stock, retained earnings, treasury stock, and reserve.
  • If liability exceeds assets, negative equity exists.
  • Ownership equity is also known as risk capital or liable capital.
  • Accounts listed under ownership equity include (for example):

• Reporting Stockholders' Equity

  • Equity (beginning of year) + net income − dividends +/− gain/loss from changes to the number of shares outstanding = Equity (end of year).
  • A statement of shareholder's equity provides investors with information regarding the transactions that affected the stockholder's equity accounts during the period.
  • For example, equity will decrease when machinery depreciates.
  • Issue of new equity in which the firm obtains new capital and increases the total shareholders' equity.
  • Equity (beginning of year) + net income − dividends +/− gain/loss from changes to the number of shares outstanding = Equity (end of year).

• ROE and Potential Limitations

  • The total shareholder equity in the business is $50,000.
  • What is the return on equity?
  • Return on equity (ROE) measures the rate of return on the ownership interest or shareholders' equity of the common stock owners.
  • Return on equity is equal to net income, after preferred stock dividends but before common stock dividends, divided by total shareholder equity and excluding preferred shares.
  • ROE is equal to after-tax net income divided by total shareholder equity.

• Debt to Equity

  • The debt-to-equity ratio (D/E) indicates the relative proportion of shareholder's equity and debt used to finance a company's assets.
  • The debt-to-equity ratio (D/E) is a financial ratio indicating the relative proportion of shareholders' equity and debt used to finance a company's assets.
  • Preferred stocks can be considered part of debt or equity.
  • The formula of debt/equity ratio: D/E = Debt (liabilities) / equity.
  • Identify the different methods of calculating the debt to equity ratio.

• Equity Method

  • Equity method is the process of treating equity investments (usually 20–50%) of companies.
  • The investor keeps such equities as an asset.
  • Equity method in accounting is the process of treating equity investments, usually 20–50%, in associate companies.
  • The investor keeps such equities as an asset.
  • It is the ratio of the dividend yield of an equity and that of the long-term bond.

• The Cost of Common Equity

  • The cost of equity is the return on equity that is required in order to compensate investors for the risk they undertake.
  • The cost of equity is broadly defined as the risk-weighted projected return required by investors on a company's equity in order to compensate investors for the risk they undertake.
  • The cost of equity can be estimated by comparing the investment to other investments with similar risk profiles.
  • The CAPM shows that the cost of equity is equal to the risk free rate plus a premium expected for risk.
  • There are other options for estimating the cost of equity outside of using the capital asset pricing model.

• Return on Common Equity

  • Return on equity (ROE) measures how effective a company is at using its equity to generate income and is calculated by dividing net profit by total equity.
  • ROE is the ratio of net income to equity.
  • Equity is the amount of ownership interest in the company, and is commonly referred to as shareholders' equity, shareholders' funds, or shareholders' capital.
  • The return on equity is a ratio of net income to equity.
  • It is a measure of how effective the equity is at generating income.

• Assessing and Restoring Equity

  • The assessment and restoration of equity helps improve employee performance and organizational behavior.
  • Equity theory plays a role in analyzing organizational behavior.
  • Equity theory suggests that individuals who perceive themselves as either under-rewarded or over-rewarded will experience distress, and that this distress leads to efforts to restore equity within the relationship.
  • The core concept of equity theory amounts to each party's inputs and outcomes equating.
  • Distinguish the core components of equity theory that seek to measure equity accurately and restore equity when appropriate