Chapter 3 part III Flashcards
Intrinsic value
value which is justified by the facts (Benjamin Graham). In other words, a measure of what an asset is worth.
market value
the current price established by a free and open system of buyers and sellers
Describe the dividend discount model of stock valuation
the value of a stock is the present value of the stream of all future dividends
Assume a preferred stock pays an annual $3.00 dividend and the required rate of return is 11%. What is the value of the stock?
$3.00/.11 = $27.27
Assume a common stock pays a quarterly dividend of $.40 that is growing at 7% a year. the investor’s required rate of return is 12%. According to the constant growth dividend discount model, what is the value of this stock?
The annual dividend is 4 x $.40 = $1.60.
Therefore, 1.60(1.07) / (.12 - .07 = $1.712 / .05 = $34.24
XYZ’s earnings are estimated to be $3.60 per share next year. the current P/E ratio is 12. What price would you estimate for XYZ next year.
$3.60 x 12 = $43.20
Explain how time value of money concepts apply to bond valuation
the value of a bond is the present value of the stream of interest payments plus the present value of the maturity, or face, value. Bond coupon payments, although of equal amounts, contribute less and less to a bonds present value as it moves into the future.
The present value of the amount of the bond to be received at maturity (the maturity value, face, value, or par value) is less the longer the time to maturity.
Identify factors that can affect bond values:
size of cash flows, timing of cash flows, interest rate changes, changes in inflation rates, credit risk, currency risk, and reinvestment risk.
Variables that fundamental analysis takes into account - economic analysis
- business cycle
- federal reserve policies
- new tax policies
- wage rates
- inflation expectations
- public confidence
- economic trends
- trade issues
- savings rates
Variables that fundamental analysis takes into account - industry analysis
- competition
- technology
- change
- accounting conventions
- cost structure
- demand factors
- business cycle
- financial norms
Variables that fundamental analysis takes into account - company analysis
- earnings
- dividends
- cost of capital
- cash flow
- products
- financials
- R&D
- strategy
- competition
- management
- financial ratios
List the stages of the business cycle:
Expansion
Recession
Recovery
Characteristics of business cycle - expansion
high interest rates, high capacity utilization, increasing wage demands, and inflation
Characteristics of business cycle - recession
increased unemployment, falling interest rates, slowing consumer demand and purchases of capital equipment, and decreased lending
Characteristics of business cycle - recovery
longer hours worked, increased economic output, reduction in unemployment, and increased consumer spending.
How does this gov policy affect the economy - fiscal policy
in times of recession, gov fiscal policy aims to stimulate the economy through tax reduction (so that consumers have more money to spend on goods and services) and increased gov expenditures, which also tend to increase the level of economic activity.
How does this gov policy affect the economy - monetary policy
during periods of recession, the federal reserve generally increases the money supply, loosens credit restrictions, and attempts to drive down interest rates as these actions tend to stimulate the economy. The reverse prevails during times of expansion, when inflation is the Fed’s key concern.
liquidity ratios
measure of a company’s ability to meet its short-term financial obligations
profitability ratios
measure the relative profitability of a company
debt ratios
measure the extent to which the firm finances its assets by debt
activity ratios
measure the rate at which a company is turning its inventory or accounts receivable into cash.
What is meant by technical analysis
technical analysis attempts to predict future stock prices by analyzing a range of market information related to supply and demand
List several assumptions used in technical analysis
- supply and demand determine stock market prices
- shifts in supply and demand can be detected sooner or alter in charts.
- stock prices move in trends (less minor fluctuations) that are fairly persistent over time
- trend reversals are the result of important supply/demand shifts
- price movement patterns repeat themselves over time
Describe several conclusions that can be drawn from major studies regarding marketing
- avoid high levels of trading based upon technical information or market timing
- use market timing only infrequently an din the broad sense - rebalancing portfolios from one asset class to another in response to very long-term movement in the economy or the industry
- educate clients to the fact that stocks are their best friend over the long term.
