Exam 3 - Chapter 13 [SLIDES] Flashcards

1
Q

Fundamental analysis models

A

A company’s value by assessing its current and future probability

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2
Q

Fundamental analysis is to identify

A

Misprinted stocks relative to some measure of “true” value derived from financial data

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3
Q

True value is

A

Intrinsic value

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4
Q

Models of equity valuation

A
  • use of financial statements
  • dividend discounts model (DDM)
  • Price/Earnings Ratios
  • Free cash flow models
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5
Q

Valuation of MArket Comaprables and Financial Statemntsz to estimate firm value

How do they do this?

A
  • Compare valuation ratios of firms to industry averages
  • Ratios like price/sales are useful for valuing start-ups that have yet to generate positive earnings
  • Book values are based on historical cost, not actual market values
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6
Q

Which one you use the book value or the market value when you are estimating?

A

Market value

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7
Q

Examples of Comparative Valeu

A
  • Price-to-book ratio
  • price to cash flow ratio
  • price to sales ratio
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8
Q

Prices to book ratio used what value
Market value
Book value

A

Book value - balance sheet, etc

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9
Q

Price to cash flow ratio uses what type of value
Market value
Book value

A

Market value - uses the stock

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10
Q

The DDM says the stock price should equal

A

The present value of all expected future dividends

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11
Q

PV0=

A

Present value

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12
Q

Do =

A

Dividend at time t

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13
Q

K =

A

Market required rate of return.

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14
Q

Intrinsic value (IV)

A

Is the “true” value, according to a model with my own information

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15
Q

THe market values

A

(MV, or market price) is the consensus value of all market participants, (maybe, excluding me)

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16
Q

My trading signal

A

IV > MV Buy
IV < MV sell or Short sell
IV = MV Hold or Fairly Priced

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17
Q

The runner on a stock is composed of

A

Dividends and capital gains or losses

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18
Q

Whose expectations (Expected HPR)

A

My expected HPR may be more or less than the market required rebate of return in equilibrium

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19
Q

K is often called

A

Market capitalization rate !!!

IMPORTANT

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20
Q

If I believe that sick is priced correctly, k should equal to the ___

A

Expected return

21
Q

Treading Signal

A

E(r) > K Buy
E(r) < k sell or short sell
E(r) = K hold or fairly priced

22
Q

Constant growth DDM Implications

Assumptions:

A
  1. A stable dividend policy (constant retention) (plowback) rate, B) 2. Earn a stable return (ROE), r, on new equity investment (i) overtime
23
Q

Implying the earnings grows at g =

24
Q

Implying Ge= Gd =

A

R x B since the retention (plowback) rate is constant

25
G =
ROE x B `
26
Constant Growth model implies the
Price is expected to grow at the constant dividend growth rate of G
27
The constant growth rate DDM implies that that the value of stock will be higher for
1. Larger expected dividend per share 2. Lower market capitalization rate, k 3. Higher expected growth rate of dividends
28
the stock price is expected to grow at the same rate as ______
Dividends
29
The value per share equals the value of the assets already in place, the _______ ____ the NPV of its future investments Which is called the _______ or ______ This is bold so understand it
No-growth value per share Plus Present value of growth opportunities or PVO
30
Price (PVo) =
No-growth value per share + PVGO
31
P/E rises dramatically with __
PVGO
32
High P/E indicates that the firm has ______ _______ _________
Ample growth opportunities
33
When PVGO = 0 , P0 = E1/k
-
34
High growth is a ____ stock
Pe (price earning)
35
HIGH _____ generates high PE ratio
PVGO
36
P/e increases: (2)
- as ROE increases | - As plowback increases, as long as ROE > k
37
Wall Street rule of thumb:
The growth rate is roughly equal to the P/E ratio
38
If the P/E ratio of Coca coal is 15, you’d expect the company to be growing at about ____ per year
15%
39
P/e deals with
Growth rate of the company
40
When risk is higher, k is high; therefore P/e is ____
Lower
41
K
Market rate of return
42
What do you use for P/E analysis
- use of accounting earnings - inflation - reported earning fluctuate around the business cycle
43
All different industry have different ___ Ratio
P/e
44
Free cash flow approach | - Value the firm by _______ free cash flow at WACC
Discounting
45
Free cash flow :
Whatever cashlofw corporation gives to creditor and shareholder
46
Operating cash flow will use to
- capital expenditures | - increase in net working capital
47
_______ is freee cash flow
Dividend
48
Another name for free cash flow for the firm
Often called cash flow from asset
49
Free cash flow goes to
Cash flow to creditors + Cash flow to shareholders