Exam 3 - Chapter 13 [SLIDES]

Question 1

Fundamental analysis models

Answer 1

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

Question 2

Fundamental analysis is to identify

Answer 2

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

Question 3

True value is

Answer 3

Intrinsic value

Question 4

Models of equity valuation

Answer 4

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

Question 5

Valuation of MArket Comaprables and Financial Statemntsz to estimate firm value

How do they do this?

Answer 5

• 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

Question 6

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

Answer 6

Market value

Question 7

Examples of Comparative Valeu

Answer 7

• Price-to-book ratio
• price to cash flow ratio
• price to sales ratio

Question 8

Prices to book ratio used what value
Market value
Book value

Answer 8

Book value - balance sheet, etc

Question 9

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

Answer 9

Market value - uses the stock

Question 10

The DDM says the stock price should equal

Answer 10

The present value of all expected future dividends

Question 11

PV0=

Answer 11

Present value

Question 12

Do =

Answer 12

Dividend at time t

Question 13

K =

Answer 13

Market required rate of return.

Question 14

Intrinsic value (IV)

Answer 14

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

Question 15

THe market values

Answer 15

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

Question 16

My trading signal

Answer 16

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

Question 17

The runner on a stock is composed of

Answer 17

Dividends and capital gains or losses

Question 18

Whose expectations (Expected HPR)

Answer 18

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

Question 19

K is often called

Answer 19

Market capitalization rate !!!

IMPORTANT

Question 20

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

Answer 20

Expected return

Question 21

Treading Signal

Answer 21

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

Question 22

Constant growth DDM Implications

Assumptions:

Answer 22

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

Question 23

Implying the earnings grows at g =

Answer 23

R x B

Question 24

Implying Ge= Gd =

Answer 24

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

Question 25

G =

Answer 25

ROE x B `

Question 26

Constant Growth model implies the

Answer 26

Price is expected to grow at the constant dividend growth rate of G

Question 27

The constant growth rate DDM implies that that the value of stock will be higher for

Answer 27

1. Larger expected dividend per share
2. Lower market capitalization rate, k
3. Higher expected growth rate of dividends

Question 28

the stock price is expected to grow at the same rate as ______

Answer 28

Dividends

Question 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

Answer 29

No-growth value per share
Plus
Present value of growth opportunities or PVO

Question 30

Price (PVo) =

Answer 30

No-growth value per share + PVGO

Question 31

P/E rises dramatically with __

Answer 31

PVGO

Question 32

High P/E indicates that the firm has ______ _______ _________

Answer 32

Ample growth opportunities

Question 33

When PVGO = 0 , P0 = E1/k

Answer 33

-

Question 34

High growth is a ____ stock

Answer 34

Pe (price earning)

Question 35

HIGH _____ generates high PE ratio

Answer 35

PVGO

Question 36

P/e increases: (2)

Answer 36

• as ROE increases

- As plowback increases, as long as ROE > k

Question 37

Wall Street rule of thumb:

Answer 37

The growth rate is roughly equal to the P/E ratio

Question 38

If the P/E ratio of Coca coal is 15, you’d expect the company to be growing at about ____ per year

Answer 38

15%

Question 39

P/e deals with

Answer 39

Growth rate of the company

Question 40

When risk is higher, k is high; therefore P/e is ____

Answer 40

Lower

Question 41

K

Answer 41

Market rate of return

Question 42

What do you use for P/E analysis

Answer 42

• use of accounting earnings
• inflation
• reported earning fluctuate around the business cycle

Question 43

All different industry have different ___ Ratio

Answer 43

P/e

Question 44

Free cash flow approach

- Value the firm by _______ free cash flow at WACC

Answer 44

Discounting

Question 45

Free cash flow :

Answer 45

Whatever cashlofw corporation gives to creditor and shareholder

Question 46

Operating cash flow will use to

Answer 46

• capital expenditures

- increase in net working capital

Question 47

_______ is freee cash flow

Answer 47

Dividend

Question 48

Another name for free cash flow for the firm

Answer 48

Often called cash flow from asset

Question 49

Free cash flow goes to

Answer 49

Cash flow to creditors
+
Cash flow to shareholders