103-9 Stock Valuation Concepts Flashcards
Balance Sheet
Snapshot of the company’s financial standing at a point in time and includes assets, liabilities, and stockholder’s equity (net worth)
Income Statement
Aka profit and loss statement
Shows all income and expenses of the business owner over a period of time
Business Statement of Cash Flows
Assists in the reconciliation of the business income statement to changes between 2 balance sheets
Pro Forma Income Statement
Projects for the future
If the projections accurately predict a decline in business profitability, the business entity of businessowner(s) can make operational changes, such as increasing prices or decreasing costs, before the events actually occur
Created by first estimating gross profit & total expenses for the coming year or years and then accounting for the amount of taxes due on the net profit
Book Value
Refers to the amount of equity available to its shareholders – the amount that the shareholders have invested in the company
Equivalent to net worth on an individual’s statement of personal financial position
2 Primary Forms of Security Analysis
A) Fundamental Analysis
B) Technical Analysis
Fundamental Analysis
The process of determining the FMV or intrinsic value of a security and looking for mispricings
Market Value
The price of its stock as determined by investors in the secondary market
Top-Down Fundamental Analyst
Begins w/ researching the overall economy and current state of the secondary market
Bottom-Up Fundamental Analyst
Conducts his analysis in a manner opposite that of the top-down proponent
Aka the stock picker
Technical Analysis
An attempt by analysts to determine the demand side of the supply-demand equation for a particular stock and, therefore, to predict the direction of its market price
Believe that the history of the stock price will tell the entire story of the security and that there is no need to be concerned w/ such things as ratio analysis
Sometimes called chartists
Dow Theory
Based on the premise that measures of stock prices, such as averages and indexes, should move coincidentally
If prices in several indexes are increasing at the same time, a bull market is underway
If those indexes are declining simultaneously, a bear market has begun
Odd-Lot Theory
Adherents of this theory believe that these investors invariably buy and sell in this manner at the wrong time
Short-interest theory
High amount of short interest is considered bullish
Low amount of short interest is considered bearish
When thinking about these, taking the view of a contrarian
Technical charting implies 3 basic assumptions
1) Markets discount the fundamentals
2) Markets trend
3) Trends repeat
Expected Return
The return that the investor demands or expects to make and is computed by multiplying each of the investment’s possible annual returns by the probability that they will occur and adding the results
Intrinsic Value
Its discounted present value based on future cash flows as determined by some form of the dividend discount model
Constant Growth Dividend Discount Model
Most appropriate for valuing mature companies
Aka Gordon Model
Used to determine the intrinsic value of a stock when dividends are growing at a constant rate
Multistage Growth Dividend Discount Model
Most appropriate for valuing companies in the growth phase
Assumes that the growth rate of the stock’s dividend is not constant but rather changes (either up or down)
No-Growth (Perpetuity) Dividend Discount Model
Used to calculate preferred stock
When the dividend is expected to remain constant
Discounted Free Cash Flow Model
Mathematically equivalent to the constant growth dividend discount model except that the current year’s dividend or next year’s dividend is replaced by FCFE on a per share basis
Free Cash Flow to Equity (FCFE)
The company’s operating cash flow less its current year’s capital investments and debt repayments (including any outstanding or cumulative preferred dividends payable)
Discounted Earnings Model
Aka capitalized earnings method
Discounts earnings instead of cash flows as in the dividend growth models
Simplistic method for valuing a corporation and its outstanding stock
Market-Based Models of Relative Valuation
Aka ratio analysis Used by fundamental security analysts Price-to-earnings (P/E) ratio Price-to-earnings dividend by growth (PEG) ratio Price-to-free-cash-flow (P/FCF) ratio Price-to-sales (P/S) ratio
