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RPA 4 > Assignment 9 - Inv. Mgmt: Growth and Value Through Equity Investing > Flashcards

Assignment 9 - Inv. Mgmt: Growth and Value Through Equity Investing Flashcards

1
Q
  • inv. of a certain sum of money at regular intervals in the same stk or stks or the same inv. intermediary.
  • normally results in a lower cost per share to the investor
  • most suited for: inv. w/ more or less uniform amts of $ periodically available for inv., who want to follow inv. policy of buying and holding securities, and generally don’t want to try and forecast stk prices
A

dollar-cost averaging

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2
Q
  • type of order
  • specifies the max price an inv. is willing to pay, or if selling, the min. price the inv. is willing to accept
A

limit order

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3
Q
  • type of order
  • to buy or sell securities at the best price obtainable at the moment
A

market order

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4
Q

statute that permits a prop. owner to exchg prop. for other RE w/o recogninzing any cap. gains on prop. exchg’d

like-kind exchanges

A

Sect. 1031

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5
Q
  • type of order
  • used to sell a stk once its price reaches a certain point, usually below the current market price
A

stop-loss order

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6
Q
  • selling securities that the inv. either doesn’t possess, and therefore must borrow to settle the acct, or does possess but doesn’t wish to deliver
  • usually b/c inv. expects a declining mkt price for the security
A

selling short

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7
Q
  • Stock Valuation Concept (Mkt Approach)
  • measured amt of assets a corp. has working for each share of CS
  • calc’d by taking net assets on balance sheet, subtracing FV of creditor’s and preferred s/hs’ claims and dividing the quotient by the # of outstanding common shares of company stock.
A

net asset value per share

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8
Q

trade or bus. in which the taxpayer does NOT materially partic. on a reg., continuous and substantial basis or an activity primarily involving the rental of prop.

A

passive activity

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9
Q
  • Type of Option
  • you pay a premium for the right to BUY a stk at a certain price b/c you think it will go UP later.
  • paying for the right to BUY stock in the future at today’s price
A

Call Option

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10
Q
  • Type of Option
  • pay a premium for the right to SELL a stk at a certain price b/c you think it will go DOWN later
A

put option

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11
Q
  • Stock Valuation Concept (Mkt Approach)
  • earnings per share w/o reducing profits by deprec. or other noncash expenses
  • allows analysts to better compare firms w/ varying depreciation policies
A

Free CF Per Share

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12
Q
  • Stock Valuation Concept (Mkt Approach)
  • stk’s Mkt price divided by the current EPS of corp.
  • measures stk price against the earning power of the stock (under- or over-valued)
A

Price/Earnings Ration (P/E)

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13
Q
  • Stock Valuation Concept (Mkt Approach)
  • P/E divided by the company’s historical avg annual profit growth
A

Price/Earnings Growth Ratio (P/EG)

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14
Q
  • Stock Valuation Concept (Mkt Approach)
  • per share calc. of the estimated amt that could be realized if the corp’s net assets were sold off
A

Liquidating Value Per Share

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15
Q
  • Stock Valuation Method (income approach)
  • disc. expected future earnings of corp. for the indefinite future at the investors’ required rate of return (discount rate)

value of stk = _ e__arnings (E) _

  discount rate (r) - assumed growth rate (g)
A

capitalized earnings (net income) model discounts

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16
Q
  • Stock Valuation Method (income approach)
  • perform a yr-by-yr forecast of corp’s NI or CF for 5-7 yrs
  • income can vary during this period
  • each figure is then discounted back to its current PV
  • at end of period, “terminal value” is calculated on the assumption that the corp’s income will grow at a constant rate from then on in to the future
A

Discounted CF Model (DCF)

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17
Q
  • Stock Valuation Method (income approach)
  • discounts the expected future divs of a stk
  • PV of an infinite stream of divs is used to estimate the FMV the stk
  • Divs represent CF that s/h received when investing in CS
A

Dividend Discount Method (DDM)

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18
Q

Factors used in developing the discount rate

A
  • r/f rate of return or t-bill rate = time value of money
  • equity risk premium = acct for premium that could be received in relation to the riskiness of the asset
  • additional adjmt to account for risk chara. of the stk
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19
Q
  • type of inv. analysis
  • selection of stks based on the several variables that affect success prospects in the mktplace
  • internal and external factors used
  • “top-down”
A

fundamental analysis

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20
Q
  • type of inv. analysis
  • predict the changes in stk prices up/down
  • based on movements or the activity of the price or trading volume of the stk itself or of the mkt generally
A

trechnical analysis

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21
Q
  • type of technical inv. analysis
  • records of past stk prices are analyzed
A

charting

22
Q
  • type of technical inv. analysis
  • seeks to predict the L/T trends in stock prices by studying peaks and troughs in teh mkt avgs
A

Dow theory

23
Q
  • type of technical inv. analysis
  • compares volumes of stk trading
A

flow of funds indications

24
Q
  • type of technical inv. analysis
  • analysis of insider trading activity
A

sentiment indications

25
Q
  • type of order
  • good until canceled
A

open order

26
Q
  • type of order
  • good for the day on which the order was placed
A

day order

27
Q
  • type of order
  • a stop loss order but at a specified price, rather than below a set floor
A

stop limit order

28
Q

Theory that the investor agressively seeking returns primarily in the form of cap. growth rather than div. income

exp = purchasing growth MFs

A

growth theory

29
Q

theory that the investor selects stks of companies that have highly solvent balance sheets and appear to be undervalued by the mkt

requires patience and systematic security analysis

A

value investing

30
Q

adv. of RE inv.

A
  • availability of substantial fin. leverage
  • favorable CF
  • hedge against inflation (prices rise with inflation)
  • tax adv.
31
Q

tax adv. of RE inv.

A
  • deprec. is noncash income tax ded.
  • costs to operate/maintain prop. are tax ded.
  • RE can be traded/exchg’d for like property on tax-free basis (Section 1031)
  • Grains resulting from the sale of RE are normally cap. gains
  • refinancing RE is a way of extracting value from RE w/o incurring cap gains tax
32
Q

disadv. of RE inv.

A
  • lack of marketability - cannot be easily moved when needed, illiquid
  • need for lg initial inv. (down pmt)
  • RE cycles and leverage - may be difficult to time and extract gains from RE for novices
  • high risk level due to fixed nature
33
Q
  • corp. or bus. trusts that meet the tax law requirement and invest primarily in RE
  • provides: centralized mgmt, limited liaibility, continuity of int. and transferability of int.
  • most or all earnings can be transferred to s/hs which can avoide corp. income tax (taxed ordinary income to s/h)
  • main tax-shelter aspect - depreciation
  • int. exp. is ded. but will decline with amortization through the yrs
A

Real Estate Inv. Trusts (REIT)

34
Q
  • type of Real Estate Inv. Trusts (REIT)
  • derive revenues primarily from rental income and capital gains from the properties they own
A

equity REITs

35
Q
  • type of Real Estate Inv. Trusts (REIT)
  • receives revs from the int. income from mortgage loans they make
A

mortgage REITs

36
Q
  • type of Real Estate Inv. Trusts (REIT)
  • combo of equity and mortgage approaches
A

hybrid REITs

37
Q

law put in place by TRA of 1986 to prohibit taxpayers from using what are defined as “passive activity” losses to shelter other forms of income

A

Passive Activity Loss (PAL) rules

38
Q

exception to PAL for indiv. who actively participates in rental activity

A

deduct up to $25,000 of losses from rental RE each yr from other sources of income provided that taxpayer’s AGI is < $100,000

39
Q
  • stks and bonds offered by coprs. for the first time
  • considered speculative inv.
  • most don’t prove successful in the long run
A

initial public offerings (IPOs)

40
Q

speculation on price changes in commodities

wheat, corn, oats, soybeans, potatoes, platinum, copper, silver, coca, eggs, etc…

risky investing done on margin in order to magnify gains (but also magnify losses)

A

commodity futures trading

41
Q

an agreement to buy or sell a commodity at a price stated in the agreement on a specified date

A

futures contract

42
Q

the use of borrowed funds to try to incr. the rate of return that can be earned on an investor’s own funds invested in a project

A

leverage

43
Q
  • stock valuation concept under the Mkt Approach
  • the income available to CS s/holders is divided by the avg # of common shares actually outstanding
A

Earnings per share (EPS)

44
Q
  • stock valuation concept under the Mkt Approach
  • %age that the annual cash div bears to the current mkt price of the stk
A

Yield (current div yield of CSs)

45
Q

the income available to common s/holders divided by the avg common shares actually outstanding plus the potential common shares that would be outstanding if the dilutive effect of the EE stk options and other stk awards outstanding, convertible securities and warrants were consider

A

diluted EPS

46
Q

types of CS transactions

A
  • mkt order
  • limit order
  • open orders
  • day orders
  • stop-loss orders
  • stop-limit orders
47
Q
A

Operating Rate of Return

48
Q

kinds of ded. permitted for oil- and gas-drilling inv.

A
  • person w/ a working int. in oil and gas drilling to deduct their losses from these ops against their other taxable income
  • also true if investor agrees to become a general partner (w/ unlimited liability) in the venture
  • not ture if limited liability partner
49
Q

what constitutes as a passive activity for the purpose of PAL rules?

A
  1. trade/business in which the taxpayer doesn’t materially partic. on a regular, continuous and substantial basis
  2. an activity primarily involving rental of property, whether the taxpayer materially partic. or not
50
Q

writer of call options

A
  • wants to secure an attractive yield on an existing inv.
  • increased yield comes from the premiums received by the option writer on the options granted to buyers
  • gives up the opportunity for cap appreciation on stk owned that is called away
  • if price of stk declines, option writer bears the risk

RPA 4 (12 decks)

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