Crunch Time : Chapter 12 Flashcards
What is a stop order?
A suspended market order
What does a stop-limit order become once activated?
A limit order
What does fundamental analysis involve?
Researching a company’s sales, long-term strategy, and financial statements
What is filed with the SEC upon the occurrence of a material event?
A Form 8-K
How soon must a Form 8-K be filed after a material event occurs?
Within four business days
What can the income statement be used to estimate?
A company’s cash flows
What do leverage ratios measure?
The amount of debt that a company has
What does the debt-to-equity ratio measure?
The degree of leverage for a company
What does a debt-to-equity ratio of 1.0 indicate?
The accounting value of a company’s liabilities and equity are equal
How is the Price-to-Earnings (PE) Ratio calculated?
Stock Price ÷ Earnings Per Share (EPS)
What is an asset’s book value?
The accounting value, not the market value
What does the price-to-book ratio compare?
The market price of a company’s stock to the accounting value of the company
Fill in the blank: To calculate the debt-to-equity ratio, the _______ or book value of the debt and shares may be used.
market value
If a company’s PE ratio recently fell, what could have occurred?
Either the share price declined or EPS increased
If a company’s PE ratio recently rose, what could have happened?
Either the share price increased or EPS declined
What is the Wilshire 5000-to-GDP ratio used for?
To determine whether U.S. stocks are over- or under-valued
In Modern Portfolio Theory, what is the basic measure of risk?
Standard deviation
According to CAPM, what are the two specific types of risk?
- Diversifiable (non-systematic risk) * Non-diversifiable (systematic risk)
What does alpha measure?
Non-systematic risk
What does beta measure?
Systematic risk
What is beta in relation to the stock market?
A stock’s covariance or correlation with the overall stock market
What may tactical asset allocation include?
Sector rotation
What do strategic investors believe about markets?
That markets are efficient and active investment management doesn’t produce excess risk-adjusted returns
What are tax-adjusted returns adjusted for?
Taxes, but not inflation
According to the dividend discount model, under what condition is a stock considered a good investment?
When its market value is less than the present value of future dividends
What is the formula for net yield (after-tax yield)?
Taxable yield x (100% - tax bracket %)
What is the formula for calculating inflation adjusted return (real return)?
Nominal yield – inflation rate
How many times per year is a reporting company required to file a Form 10-Q?
Three times
How often is a Form 10-K filed?
Annually
To calculate the amount needed to assure payments in perpetuity, what must be done?
Divide the annual income desired by the rate of interest needed
What is a measure of profitability?
Earnings per share (EPS)
How is a company’s market capitalization calculated?
By multiplying the current market value of its stock by the number of shares outstanding
What happens if a company purchases an asset and finances it through debt?
It will increase its percentage of debt capital-to-equity capital
What does technical analysis use to make trading decisions?
Charts, pricing trends, and support and resistance levels
What moving averages might a technical analyst examine?
- 50-day moving average * 200-day moving average
What characteristics do value stocks have?
- Low P/Es * Low price-to-book ratios * High dividend payout ratios
What characteristics do growth stocks have?
- High P/Es * High price-to-book ratios * Low dividend payout ratios
What is the dividend discount model?
A stock valuation method that estimates future dividends and discounts them to their present value
What formula does the dividend discount model use?
The same formula as the present value of a perpetuity
What concept is covered in behavioral finance?
Loss aversion
What type of index is the S&P 500?
A capitalization-weighted index
What type of index is the Dow Jones Industrial Average (DJIA)?
A price-weighted index
What does the MSCI EAFE index represent?
An index of foreign (i.e., non-U.S.) stocks
What is the best way to calculate a fund’s annual return over several years?
Geometric means
What is the formula for Total Return?
(Sale Price – Purchase Price + Dividends/Interest) ÷ Purchase Price
What is the formula for Net Present Value (NPV)?
Discounted Value of Cash Flows – Market Price
What does an investment’s internal rate of return (IRR) represent?
The return that makes the net present value (NPV) equal to zero
What cash flows does an investment’s IRR use?
Only positive cash flows and negative cash flows from an investment
If the net present value (NPV) of an investment is greater than zero, what does that indicate?
The investment’s current market price is less than the discounted cash flows
If the net present value (NPV) of an investment is less than zero, what does that indicate?
The investment’s current market price is greater than the discounted cash flows
What will buying investments with a positive NPV do?
Increase an investor’s wealth
