Chapter 13: Portfolio and Securities Analysis Flashcards
Balance sheet formula
Assets = liabilities + stockholders equity
Calculate working capital
Working capital = current assets - current liabilities
Calculate net worth
Net worth = assets - liabilities
Calculate P/E ratio
Market Price / EPS
Tight money yield curve indicates
-Interest rates have recently increased -Short term bonds are yielding more than long term bonds
What is the formula for earnings per share?
(Net income - preferred dividends) / # of common shares outstanding
Head and shoulders and Inverted head and shoulders
Top formation = reversal of a bullish trend, becuase trends downward Inverted = reversal of a bearish trend, because trends upward
What is Consolidation?
-When a stock stays within a narrow trading range or trading channel -When a stock stays within a narrow range for a long period of time it creates a support and resistance level
Support
Bottom of the trading range
Resistance Level
Top of the trading range
Saucer and Inverted saucer
-Saucer = gradually decreasing and then gradually increasing. Bullish. -Inverted Saucer = gradually increasing and then gradually decreasing. Bearish
ABC is in the process of buying a new $50,000 computer system. If it is paying for the system with available cash, what is the effect on the balance sheet?
- A. the net worth decreases and the working capital remains the same
- B. the net worth remains the same and the working capital remains the same
- C. the net worth decreases and the working capital decreases
- D. the net worth remains the same and the working capital decreases
D. the net worth remains the same and the working capital decreases
- The company is exchanging one asset for another, and the overall liabilities remain the same, so the net worth of the company doesn’t change.
- However, the company is using a current asset (cash) to purchase a fixed asset (the computer system), so the working capital (the amount of money the company has to work with) decreases:
- Net worth = assets - liabilities
- working capital = current assets - current liabilites
ABC has 1 million common shares outstanding. If ABC’s net income is $14 million, what are the earnings per share?
- A. $0.07
- B. $0.70
- C. $14.00
- D. cannot be determined
C. $14.00
- EPS = (net income - preferred dividends) / number of common shares outstanding
- EPS = $14,000,000 - 0 / 1,000,000 = $14.00
During a period of tight money, when the yield curve is inverted, which of the following securities is likely to have the highest yield?
- A. T-bills
- B. commercial paper
- C. T-notes
- D. AA-rated corporate bonds
B. commercial paper
- Because you are dealing with an inverted yield curve and tight money, short term debt securities have higher yields than long term debt securities.
- The two short term securities are T-bills and commercial paper.
- But T-bills are issued by the federal government and are considered very safe, therefore they would be expected to have a lower yield.
Which of the following types of preferred stock allows the investor to reduce inflation risk?
A. cumulative
B. noncumulative
C. convertible
D. participating
C. convertible
According to the US Department of Commerce, the following are defined as:
- Recession
- Depression
- a decline in the real output of goods and services (GDP) for 6 months or more
- a severe downturn lasting 18 months (6 quarters) or more with unemployment rates greater than 15%
The market is said to be ________ if a market index such as the DJIA or the S&P 500 is declining but fewer stocks are declining than advancing. If the market is showing this behavior, it is likely a good time to buy.
Oversold
If the market is ________ if market indexes such as the DJIA or the S&P 500 is increasing but fewer stocks are advancing than declining. Likely a good time to sell or sell short.
Overbought
________ is the amount of money a company has to work with right now. It is current assets - current liabilities.
Working capital
