Equity Investments (10%)

Question 1

Price Continuity

Answer 1

Prices do not change from one transaction to the next unless substantial new information becomes available.

Question 2

Prices do not change from one transaction to the next unless substantial new information becomes available.

Answer 2

Price Continuity

Question 3

Call Market

Answer 3

A market where all bids/asks are gathered to arrive at a single price where quantity demanded is close to quantity supplied.

Question 4

A market where all bids/asks are gathered to arrive at a single price where quantity demanded is close to quantity supplied.

Answer 4

Call Market

Question 5

Weak form market efficieny?

Answer 5

*mkt fully reflects all currently available security mkt data. *

past price and volume info has no bearing on mkt.

• cannot make money based on tech analysis.

Question 6

Semi weak form mkt efficiency?

Answer 6

• security prices rapidly adjust w/o bias to arrival of all new public info.
• current security prices fully reflect all publicly available *info. *
• all past info is included.

Question 7

Strong form market efficiency?

Answer 7

• prices fully reflect all info from public and private.
• All info included past present and even insider info.
• No one has monopolistic info compared to others, and no one should be able to get abnormal returns.

Question 8

What is the gordon constant growth dividend model?

Answer 8

• V₀=D₀(1+g)/k_e-g_c
• V₀is the stocks value
• D₀(1+g) = D₁
  *

Question 9

P/E?

Answer 9

• dividend payout ratio/(k-g)
  
  • k = required return
  • g= dividend growth rate
• mkt value/EPS
• higher p/E means higher earnings growth potential

Question 10

Asset-Based Valuation

Per Share

Answer 10

MV_Assets - MV_Liabilities

———————————

Shares

Question 11

Beta

ß

Answer 11

Covariance [Asset,Market]

——————————————

Market Variance

or

Correlation * σ_A / σ_B

Measure of risk to a benchmark. The covariance of a portfolio compared to the variance of a benchmark.

Question 12

Initial equity in margin %

Maintenance margin %

Answer 12

Initial equity (%) in the margin transaction = 1/Leverage ratio = 1/1.66 = 0.60;
Initial equity per share at the time of purchase = $36 × 0.60 = $21.60;
Price (P) at which margin call occurs:
Equity per share/Price per share = Maintenance margin (%)

= ($21.60 + P – $36)/P = 0.30;
0.7P = $14.40;
P = $20.57.

Question 13

Intrinsic value

Answer 13

Given that the Intrinsic value is P0 = P0/E1 × E1 and
Justified forward P/E is P0/E1 = p/(r – g),
where: p = payout ratio,
Dividend growth rate-g = (1 – Payout ratio) × ROE = (1 – 0.6) × 12.5 = 5%,
Justified forward P/E = P0/E1: 0.60 / (0.10 - 0.05) = 12x, so
Intrinsic value = 12 × $3 = $36.

Question 14

Price weighted index?

Answer 14

• arithmetic avg of prices of securities included in index.
• disadvantage = higher price stock has more weight.
  
  • DJIA
• needs constand rebalancing

Question 15

value (market vap) weighted index

what is the market float method?

What about free float?

Answer 15

• takes into account mkt cap
• current stock price * current shares outstanding
• indexing by going off of shares that are actually available to investing public. Not controlling stockholders since they prolly won’t sell.
• Don’t need to rebalance.
• free float - market flow that exludes shares not available to foregn buyers.
  *

Question 16

growth rate?

Answer 16

g=ROE(1-dividend payout ratio)

Question 17

fundamental weighting?

Answer 17

• Weights based on firm fundamentals such as earnings, dividends, or cash flow.
• unaffected by share prices of stocks.

Question 18

EV

Answer 18

• Enterprise value = market cap + MV of debt + MV of preferred stock - Cash and short term investments
• total company value, what it costs to acquire a firm
  
  • you take out cash cause it’s liquid and you get it after acquisition
    *

Question 19

When do you use stop buy orders?

Answer 19

1. to protect short position.
2. if you think stock is undervalued. Maybe you place stop buy to act when investors are buying more of the stock.

Question 20

operationally efficient?

Answer 20

market functioning with low trade costs, (commissions, bid-ask spreads, and price impacts).

Question 21

informationally efficient?

Answer 21

security prices reflect all info associated with fundamental value in a timely fasion.

Question 22

Critical Price for a margin call

Answer 22

original equity - P - original price = % margin

P

Question 23

Enterprise Value

EV

Answer 23

Market Capitalization

+ Debt

+ Preferred Stock

• Cash & Short Term Investments

Question 24

Intrinsic Value

Justified Forward P/E Approach

Answer 24

EPS₁ * E/P₁

or

EPS₁ * p / (r - g)