Exam Flashcards
What is the difference between intrinsic value and stock price?
Intrinsic (accounting) value is an estimate of the actual true value of a company. Market or stock value is the value of a company as reflected by the Company’s stock price - it’s what they’re actually worth.
What is a Capital Market?
A capital market is a market for buying and selling equity and debt instruments. They essentially give savings to people who need cash, promising to give it back through interest and extra dividends in the future.
What are the primary and secondary markets?
The primary market is where new securities are bought and sold for the first time, where the secondary market is for existing, used securities, rather than new issues.
What are the advantages and disadvantages of listing on the stock exchange (going public)?
Share issue raises capital, get the right value, and exposure to the capital market. The disadvantages are the cost and the stock exchange regulations that must be complied with.
What do Stock Price and Volume charts show?
The movements of the two. Stock price movements are driven by information in the market, and investors tend to engage in trading activities after the information is in the market.
What is market efficiency, and what are the foundations of Efficient Market Hypothesis?
An efficient capital market is one where the stock price fully reflects all available information. The foundations of EMH are rationality, independent deviations from rationality, and arbitrage.
What are the three versions of EMH?
Weak form - historical market trending data, such as past prices and volumes are incorporated into share prices
Semi-strong form - all publicly available information is incorporated into share prices
Strong form - all information including public, private and insider are incorporated into share prices
*the top 2 are inefficient because there is a possibility of someone having insider knowledge and profiting
What are the seven analysis of information?
Stock price and volume charts, volume analysis, bid-ask spread and liquidity, 52-week price changes, analysts following, ownership structure, and special events
What is the bid ask spread formula and inputs?
Spread = (2 x (Ask - Bid))/ (Ask + Bid), where
Bid is the highest price investors are willing to pay for a stock
Ask is the lowest price investors are willing to sell a stock
Why do firms disclose bad news?
- avoid reputations cost
- regulatory requirement
- corporate governance
- litigation risk
What is Analyst Following, and what are some benefits?
Analyst following is someone (often who works for an investment bank) who has a key objective to identify mispriced shares. The benefits are improved stock visibility and corporate governance.
What is a firm’s profit potential determined by, and what is the possible information used in a valuation?
A firm’s profit is determined by macroeconomic and other external environmental factors, condition of the industry, and management strategy.
The possible information includes economic growth (TEMPLES), industry analysis (porter’s 5 forces), and company-ape I doc information.
What does TEMPLES stand for?
Technology Economy Market Political Legal Environmental Society
What are Porter’s 5 forces, and how should you begin this analysis in the exam?
- Rivalry among existing firms
- Threat of new entrants
- Threat of substitute products
- Bargaining power of buyers
- Bargaining power of suppliers
Begin with defining the industry, being specific and including geographic location.
What are the two basic competitive strategies?
Cost leadership and differentiation
What is the purpose of Accounting Analysis?
Accounting analysis evaluated the degree to which accounting captures the reality of the business, essentially trying to assess the accounting quality of financial statements.
Accounting distortions must be mitigated, or recognised to ultimately need to be reversed. For example, if you adjust revenues to make them look $1 higher this period, revenue will need to be reduced by $1 in the future.
What are the two components of NPAT?
Cash (transactions-based)
Accruals (adjustments-based)
What is earnings management, and what is the impact?
Earnings management, or income smoothing, is often defined as the planned timing of revenues, expenses, gains and losses to smooth out bumps in earnings. The impact is that it damaged the perceived quality of reporting, and will eventually lead to unnecessary stock price fluctuations.
What are the 3 categories, and 2 examples, of incentives for Earnings Management?
- External forces, for example analyst forecasts or competition
- Internal factors, for example management compensation or unlawful transactions
- Personal factors, such as personal bonuses and ego of executives
What is Conservative versus Liberal Accounting a matter of?
Accounting policy
What is the difference between Aggressive and Big Bath Accounting, and what are they a matter of?
Aggressive accounting wants to increase profit, while Big Bath wants to temporarily decrease profit so it can increase in the future.
This is a matter of short-term accounting application they will reverse.