Equity (2): Securities, Industry & Company Analysis, Valuation Flashcards
the firm must pay the holder any omitted dividends before it can pay any dividends to common shareholders
cumulative preference shares
Issued outside the issuer’s home country & denominated in dollars
Global depository receipts
Can be sponsored or unsponsored
When book values are not stable, analysts should calculate ROE based on the _____ book value for the period.
average book value for unstable
When book values are more stable, ____ book value is appropriate, when calculating ROE
beginning BV for stable
A basket of listed depository receipts is best described as:
exchange traded fund (ETF) of Global depository receipts
______ preference shares receive extra dividends if firm profits exceed a predetermined threshold
Participating
Common stock is more risky than preferred stock and is expected to provide:
higher average returns
The depository bank retains the voting rights of the equity shares of the foreign firm
unsponsored Depository receipt
The foreign firm and the depository bank are not in collaboration
The type of equity depository receipt that gives its owners the right to vote and receive dividends from a company’s shares:
sponsored Depository Receipt
The foreign firm and the depository bank are in collaboration
identical common shares that trade in local currencies on stock exchanges around the world
global registered shares
If the currency is depreciating, investors from (inside or outside) the country will experience foreign exchange losses that decrease their returns?
outside the country (foreign investors investing in a depreciating currencies exchanges)
A company’s ROE will _____ if it issues debt to repurchase outstanding shares of equity
increase; because it would decrease the denominator (less equity)
conducted by investors wishing to time investment in industries through an analysis of fundamentals and/or business-cycle conditions
sector rotation strategy; overweighting or underweighting industries based on the current phase of the business cycle
firms with high earnings volatility and high operating leverage
cyclical firms
addresses the sources of a portfolio’s returns, usually in relation to the portfolio’s benchmark
portfolio performance attribution
Industry analysis is most useful for:
portfolio performance attribution
Identifying firms that derive their revenue and earnings from similar business activities
peer group construction;
Usually start with the commercial classification and then group based on what the business activity is
shows how demand evolves over time as an industry passes from the embryonic stage through the stage of decline
industry life-cycle model (time = x axis) (demand = y axis)
Industry members will avoid price competition in:
concentrated industry (few members in an industry)
Economic profit is earned and value is created for shareholders when the industry earns returns above the company’s:
cost of capital
Company with successful cost leadership strategy is characterized by:
low cost of capital
include a description of the company’s business, investment activities, governance, and strengths and weaknesses
corporate profile
model uses a single constant growth rate of dividends
Gordon growth model
The model that is best for valuing stable and mature, non-cyclical, dividend paying firms
Gordon growth model
For rapidly growing companies that expected to pay dividends that growth rapidly, slowing, or erratically over some period, and then become constant should use which model?
multistage growth model
Price to earnings multiples are used for:
predicting stock returns; low multiples = high future returns
the ratio most useful for when firms have different capital structures or earnings are negative
EV/EBITDA
EBITDA will still be positive, if earnings are negative
Useful for firms with large portion of tangible assets that have readily available market values
Asset based models
The intrinsic value of equity is based on the MV of assets - MV liabilites
asset based models
Measure of a firm’s dividend paying capacity
Free cash flow to equity (discount model)
In the Gordon growth model, r must be
required return > growth rate
Growth companies transitioning to the mature stage would use which model?
2-stage DDM
Young companies entering the growth phase would use which model?
3-stage DDM
Valuation technique most approprite for valuing shares of a firm that does not pay dividends:
Free cash flow model
The total value of a firm’s outstanding equity shares based on market prices and reflects the expectations of investors on future performance
Market Value of equity
In this stage, an industry is characterized by:
* increasing profitability
* decreasing prices
* low degree of competition among competitors
* Rapid demand
Growth stage
In this stage, an industry is characterized by:
* Slower growth
* industry overcapacity
* intenense competition
* protitable, but declining
Shakeout phase
In this stage, an industry is characterized by:
* litte/no growth
* stable pricing
* industry consolidation
* high barriers to entry
* efficient cost structure
Mature phase
In this industry life cycle, firms are focused on extending product lines, rather than creating new ones; resulting in:
* Efficiency gains
* Increased market share with superiod products
Growth phase
In this stage, an industry is characterized by:
* Negative growth
* Higher production costs, as demand falls
Decline stage
In this stage, an industry is characterized by:
* slow growth
* high prices
* high risk
Embryonic phase
A company that is required to raise equity capital to continue to operate as a going concern is most likely doing so to:
improve capital adequacy ratios
In cases in which a company must raise capital to ensure it can continue to operate as a going concern, capital is most likely raised to fulfill regulatory requirements, improve capital adequacy ratios, or ensure that debt covenants are met
An increase in the dividend payout ratio will most likely increase the intrinsic value when using a(n):
Present value model
An increase in the dividend payout ratio will increase the cash expected to be distributed to shareholders. The dividend discount model is the present value of the cash expected to be distributed to shareholders. Therefore an increase in the dividend payout ratio will increase the intrinsic value in a present value model
