Reading...
Play button
Play button
Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
21 Cards in this Set
- Front
- Back
|
What is the intrinsic value method of determining value of an equity?
|
Discounted cash flow approach. If intrinsic value is less than MV, stock is overpriced and vice versa
|
|
|
What is the market based method of determining value of an equity?
|
Value is estimated relative to peers. E.G. price to earnings ratio to determine whether the market currently is undervalued (less expensive given historical trends) or overvalued--overpriced.
|
|
|
What is the asset based method of determining value of an equity?
|
Book value. However should only be used as a benchmark or reference point in determining the proper price at which a stock should trade.
|
|
|
When dividends are growing at a constant rate, what model is recommended to determine intrinsic value of a security?
|
Constant Growth Dividend discount model. It assumes that G growth rate cannot be equal to or greater than the investor's R required rate
Value = D/ R return less G frowth D= dividend for 1 period not period 0.G cannot be equal or greater to required rate of return |
|
|
When dividends have VARIABLE GROWTH rates, what model is recommended to determine intrinsic value of a security?
|
Multistage (variable) growth dividend discount model. Use the following 3-step process:
1. Compute the value of each future dividend until the growth stabilizes. 2. Use the constant growth dividend discount model to compute the remaining intrinsic value of the stock at the beg. of the year when the dividend growth stabilizes. 3. Add the result in 2 to the last constant dividend Uses the uneven cash flow method to solve for the NPV (intrinsic) value of the stock, I=required rate of return |
|
|
When dividend growth rate remains constant, what model is recommended to determine intrinsic value of a security?
|
No growth (perpetuity) dividend discount model--
Value = D / R (required rate of return (note same as constrant growth dividend except g=0) |
|
|
When there are no dividends, what model is recommended to determine intrinsic value of a security?
|
Free cash flow to equity (FCFE). It is the operating CF less its current year's capital investments and debt repayments including cumulative preferred dividends payable.. It is really the same as the constant growth dividend discount model except D is replaced with FCFE
|
|
|
What is the formula discounted earnings model/capitalized earnings to determine intrinsic value of a security?
|
It is a simple method E is substituted for D and the denominator is capitalization rate
so b4 tax earnings/capitalization rate==value of company May need to divide this number by o/s shares to calculate the value per share. This method has account roblems |
|
|
What are the names of four market based models to calculate RELVATIVE value (not intrinsic)?
|
1) price to earninngs P/E ratio
2) price to earnings divided by growth (PEG) ratio 3) price to free cash flow ratio 4) Price to sales ratio |
|
|
What is the weakness of the price to sales ratio in calculating relative value?
|
It does not take into account net income so sales could be high but number will not reflect taxes or other negative effects on earnings.
|
|
|
MSA stock has a current dividend of $0.76 per share, a market price of $23.73 per share, and a beta of 1.47. The current dividend is expected to grow for three years at a rate of 3.5% and then 2 % thereafter. Assume an investor has a required rate of return of 7%. What is the intrinsic value of MSA stock?
|
Based on the multistage growth dividend discount growth model, the intrinsic value of MSA stock is $16.17.
1. Compute the value of each future dividend until the growth rate stabilizes (Years 1-3). D1 = $0.7600 × 1.035 = $0.7866 D2 = $0.7866 × 1.035 = $0.8141 D3 = $0.8426 × 1.035 = $0.8426 2. Use the constant growth dividend discount model to compute the remaining intrinsic value of the stock at the beginning of the year when the dividend growth rate stabilizes (Year 4). D4 = $0.8426 × 1.02 = $0.8595 V = $0.8595 ÷ (.07 – .02) = $17.1896 3. Use the uneven cash flow method to solve for the net present (intrinsic) value of the stock CF0 = $0 CF1 = $0.7866 CF2 = $0.8141 CF3 = $0.8426 + $17.1896 = $18.0322 I/YR = 7% Solve for NPV = $16.1659 |
|
|
What is the efficient market hypothesis?
|
The efficient market hypothesis (EMH) suggests that investors are unable to outperform the market on a consistent basis. The fundamental assumption of the theory is that current stock prices reflect all available information and that stock prices rapidly (or immediately) adjust to reflect any new information. In addition, any new information must be unexpected; therefore, any changes in the stock price resulting from this new information will be random (i.e., the random walk theory). If prices move in random fashion, any investment strategies or market techniques used to take advantage of market inefficiencies are theoretically useless.
|
|
|
What are the steps in the investment planning process
|
1. Determine whether the client has the means to invest
2. Determine time horizon, risk tolerance, select suitable investments, compare actual realized returns against expected returns, adjust and rebalance |
|
|
What are some types of unsystematic risk
|
Business-uncertainity of income; financial --affects capital structure, use of debrt makes ROE volatile; default--debr, regulation, country, investment manager risks.
|
|
|
What is shorting against the box
|
short and long on same stock.. Must avoid constructive sale, i.e., long position must be held 60 days after close of short.
|
|
|
What are requirements of futures
|
requires margin a/c; required daily settlement, i.e., mark to market; traders must realize losses in cash on a daily basis
|
|
|
How are gains and losses treated for futures
|
60% LT and 40% ST regardless
|
|
|
How do you hedge futures contracts
|
1. Determine if current position is long or short.
2. Determine rational for hedge, i.e., protection of price rise or decrease 3. Hedge accordingly |
|
|
What is an ADR
|
American Depository receipts. Used to invest internationally. It is a trust receipt issued by us bank for shares in a foreigh company and held by a foreign branch of the bank. It pays dividends in US $$ and traded on xchange. Complies with GAAP
|
|
|
What is an adv in investing in oil and gas
|
tax adv like depletion and intangible drilling costs.; large profit potential
Disadv=passive, long time horizon |
|
|
How does the value of tangible assets like natural resources correlate with financial assets
|
negatively correlated. Collectibles increase in value during inflation.
|
