Equity Valuation

Question 1

drivers of equity valuation

Answer 1

expected free cash flow generation, discounted at the required return
-forward looking strategy
-macro factors impacting demand
-forward looking margin profile

Question 2

market risk premium

Answer 2

the difference between the expected return on the stock market and the risk-free rate

Question 3

companies with higher betas have

Answer 3

a larger magnitude of loss
more susceptible to changes in the aggregate market

two things:
-quarterly dividends
-price when you sell

Question 4

dividend discount model

Answer 4

intrinsic value over a one year time horizon

Question 5

constant growth dividend discount

Answer 5

also known as the gordon model
assumption: dividends grow by a constant percent each year

Question 6

preferred stock

Answer 6

-no voting rights
-not a controlling position
-scheduled dividends which must be paid out before any dividends on common stock can be paid out
-no maturity date: is outstanding as long as the company is operating

Question 7

preferred stock valuation equation

Answer 7

Vps= annual dividend/ required rate of return

Question 8

present value of growth opportunities (PVGO)

Answer 8

intrinsic value of stock with our current growth assumptions - intrinsic value if we assumed = growth

Question 9

ratio analysis

Question 10

ratio analysis is valuable as it

Answer 10

takes current market trends into account

Question 11

ratio analysis: more attractive ratios do not necessarily imply that

Answer 11

the company is undervalued, or an attractive purchase
-they can be a signal that it is a more attractive buy once you understand why it has a more conservative metric

Question 12

price to sales

Answer 12

-share price divided by sales per share
-the major issue with this, is that is ignores a company’s cost structure
-a company with a higher EBITDA margin will likely display a higher P/S than a company with a lower EBITDA margin

Question 13

price to book

Answer 13

-share price divided by shareholders equity (GAAP) per share
-useful for capital intensive industries such as energy, manufacturing, etc.
-typically we would consider tangible equity as opposed to GAAP equity

Question 14

price to earnings ratio (P/E)

Answer 14

share price divided by earnings per share (EPS)

Question 15

higher P/E=

Answer 15

higher growth expectations

Question 16

lower P/E=

Answer 16

lower growth expectations

Question 17

comparing the P/E ratio of two companies in separate industries is inappropriate. why?

Answer 17

sources of cash flow growth:
-increases in margin
-increase in market share
-increase in aggregate market

Question 18

enterprise value (EV)/ EBITDA

Answer 18

the most widely used metric for evaluating acquisitions

when applied to public markets, it has the exact same limitations as price to earnings

Question 19

dividend yield

Answer 19

annual dividend / share price

Question 20

high growth companies have

Answer 20

low dividend yield

Question 21

low growth companies have

Answer 21

high dividend yield

Question 22

efficient market hypothesis

Answer 22

all available information is priced into the stock market- and thus you cannot outperform the market

Question 23

weak form of efficient market hypothesis

Answer 23

stock prices incorporate trading data such as past prices, trading volume, or short interest
-conclusion: “technical analysis” can’t generate above market risk adjusted returns

Question 24

semi-strong form of efficient market hypothesis

Answer 24

stock prices incorporate al publicly available information
-conclusion: neither technical analysis, nor fundamental analysis can generate above market risk adjusted returns

Question 25

strong form of efficient market hypothesis

Answer 25

stock prices incorporate all information, including material non-public information
-conclusion: no information, including material non-public information, can lead to above market risk adjusted returns