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Financial Terms related to Average

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Arithmetic average mean rate of return

• Arithmetic mean return.


• An arithmetic mean of selected stocks intended to represent the behavior of the

market or some component of it. One good example is the widely quoted Dow Jones
Industrial Average, which adds the current prices of the 30 DJIA's stocks, and
divides the results by a predetermined number, the divisor.

Average accounting return

• The average project earnings after taxes and depreciation divided by the average
book value of the investment during its life.

Average across day measures

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• An estimation of price that uses the average or representative price of a large

number of trades.

Average age of accounts receivable

• The weighted-average age of all of the firm's outstanding invoices.

Average age of inventory

• Measures the effectiveness of the company's management of inventory; it is the

average length of time inventory is held by the company.

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Average collection period

• The average amount of time needed to collect accounts receivable.

Average cost of capital

• A firm's required payout to the bondholders and to the stockholders expressed as a

percentage of capital contributed to the firm. Average cost of capital is computed by
dividing the total required cost of capital by the total amount of contributed capital.

Average dividend yield

• Combined with price appreciation, the average dividend yield (if any) can show a
potential total return from a security investment. The formula for the average
dividend yield is:
(EPS *Average Payout) / current price
where EPS = Estimated Future High EPS / (1 + EPS Growth) 2.5
Companies that pay a dividend will generally increase the dividend as EPS grow.
Share price growth will usually follow the dividend increases, and thus keep dividend
yield at a constant percentage.

Average high pe

• The average high Price-Earnings Ratio (PE) for the past five years. Used to
calculate a predicted high price.
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Average life

• In mortgage-related investments, including CMOs, the average time to expected

receipt of principal payments, weighted by the amount of principal expected.

• Also referred to as the weighted-average life (WAL). The average number of years
that each dollar of unpaid principal due on the mortgage remains outstanding.
Average life is computed as the weighted average time to the receipt of all future
cash flows, using as the weights the dollar amounts of the principal pay downs.

Average low price

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• The average of low prices for the last five years. This represents a possible low
price for a cyclical company (e.g. General Motors) whose stock price tends to
fluctuate in cycles over approximately a five year period.

Average low price earnings

• The average low Price-Earnings Ratio (PE) for the past five years. Used to
calculate a predicted low price.

Average maturity

• The average time to maturity of securities held by a mutual fund. Changes in

interest rates have greater impact on funds with longer average life.

Average payment period

• The average amount of time needed to pay accounts payable.

Average percent payout

• The average of the percentage of a company's profits paid out in dividends to

shareholders, typically calculated over the last five years. A high percent payout can
be a danger sign. Recent payout figures higher than 50%, and higher than the
average payout, may forewarn of a dividend cut. A dividend cut would likely cause
the stock price to fall. Generally, the higher the payout ratio, the lower the expected
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growth rate for the company's EPS in the future.

Sometimes, although the dividend payout is more than earnings, the company has
strong cash flow and can cover the dividend in the short term. However, a company
paying out dividends in excess of earnings on a recurring basis is a risky investment.

Average pre tax profit margin

• Pre-tax Income divided by Sales. This measures how well management converts
sales dollars into profits after deducting all the operating expenses for making and
selling its products. Compare the last two years' pre-tax profit margins with the 5-

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year average to show the trend of growth.

Average price

• In bond trading, a step in determining a bond's Yield to Maturity. A bond's average

price is calculated by adding its face value to the price paid for it, and dividing the
result by two.

Average price earning ratio

• The average of the annual high and low Price-Earning Ratios for a particular time
period, typically calculated over the last five years.

Average profit margin

• See Average Pre-tax Profit Margin.

Average rate of return

• Abbreviated ARR. The ratio of the average cash inflow to the amount invested.

Average tax rate

• A firm's taxes divided by its taxable income.

• Taxes as a fraction of income; total taxes divided by total taxable income.

Dow jones averages

• The most widely quoted and oldest measures of change in stock prices, tracking
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the prices of a group of stocks that represent Industrial, Transportation, and Utility

Dow jones industrial average

• Abbreviated DJIA. Price-weighted average of 30 actively traded blue-chip stocks,

traditionally of industrial companies.

• This is the best known U.S. index of stocks. It contains 30 stocks that trade on the
New York Stock Exchange. The Dow, as it is called, is a barometer of how shares of
the largest U.S. companies are performing. There are thousands of investment

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indexes around the world for stocks, bonds, currencies and commodities.

Moving average

• Used in charts and technical analysis, the average of security or commodity prices
constructed in a period as short as a few days or as Long as several years and
showing trends for the latest interval. As each new variable is included in calculating
the average, the last variable of the series is deleted.

• A technical analysis term. Expresses the charting of the average prices of a

security for a particular period using average daily settlement prices over a defined
period of time. For example, charting for thirty days produces a thirty-day moving

Potential average dividend yield

• Suggests the potential percentage dividend payments, compounded yearly over

the next 5 years. Combined with price appreciation, Yield makes up the possible
total return percentage.

Simple moving average

• The mean, calculated at any time over a past period of fixed length.

Weighted average
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• An average in which each number to be averaged is assigned a weight that

determines the relative importance of each figure on the overall average. Weighted
averages are often used to assign greater weight to more recent data, on the
assumption that older data may be less applicable to current conditions.

Weighted average cost of capital

• Abbreviated WACC. Reflects the expected average future cost of funds for the
upcoming year; found by weighting the cost of each specific type of capital by its
proportion in the firm's capital structure.

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• The average cost of all capital used by a firm. In the context of valuing firms, if the
capital is a mixture of debt and equity. The discount rate is called weighted average
cost of capital.
WACC = (1 - tc) * Rd * D/(D+E) + Re * E/ (D+E)
Where tc is the corporate tax rate , Rd is the contractual interest rate on (new) debt,
Re is the discount rate on equity, D and E are the market values of debt and equity
respectively. The return of all projects accepted by the corporation must exceed the
weighted average cost of capital (WACC) to create value for the shareholders.

• Expected return on a portfolio of all the firm's securities. Used as a hurdle rate for
capital investment.

Weighted average coupon

• The weighted average of the gross interest rate of the mortgages underlying the
pool as of the pool issue date, with the balance of each mortgage used as the
weighting factor.

• Is the measurement of the gross coupons underlying a Mortgage Backed Security

and weighted by outstanding balance of each mortgage.

Weighted average life

• See: Average life.

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• Is the measurement of a Mortgage Backed Securities time horizon other than

maturity. It considers the impact of all principal payments both scheduled and

Weighted average maturity

• The WAM of a MBS is the weighted average of the remaining terms to maturity of
the mortgages underlying the collateral pool at the date of issue, using as the
weighting factor the balance of each of the mortgages as of the issue date.

• Weighted Average Maturity is the mean measurement of the maturity of the

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underlying collateral weighted by each outstanding balance.

Weighted average portfolio yield

• The weighted average of the yield of all the bonds in a portfolio.

Weighted average remaining maturity

• The average remaining term of the mortgages underlying a MBS.