Game Time Flashcards
DDM
Use when you have prior history of dividends paid by company and company profitability
Company has stated clear dividend policy
Present value of expected future dividends
DCF
When an investor is valuing the firm from perspective of a potential / actual controlling shareholder
Free cash flow are expected to align with profits within reasonable period
FCFF
Cash available for distribution to debt&equity holders
FCFE
Method preferred when dividend policy of the firm is not stable or when investor owns a controlling interest in the firm
Cash is only available to equity holders
Equity value
Dividend per share /cost of equity
Gordon growth model
DIV / (r-g)
R = Discount rate
Div = dividend
G = current price of share
H model
Growth approaches terminal growth phase
Attempts to smooth out the growth rate over time
Three stage model
High growth
Transition phase
Terminal growth phase
- Initial growth then period of extreme increase / decrease then eventually stabilise at moderate rate for life of company
After tax net interest
Debt (yr before) * after tax net interest /debt ratio (current year)
Residual income
Income that is left after all personal debts and expenses are paid
Defined benefit scheme
Employees guarantee a specific retirement benefit amount for each participant based on factors such as employee salary and years of service
DB risks
Employee: DB plan is underfunded Employer: Return on plan assets will fall short The person wil continue work Annuity rate falls
DEfined contribution scheme
Primarily funded by employee - set aside part of salary - employer may match the amount
DC RISKS
risk of inflation
Risk of poor investment funds
ESG - G
GOVERNANCE
Bribery
Decisions made by top people
Impact driven investors
What is the impact of a company’s activities in the envir and society
Return driven investors
What is the potential impact of ESG issues in company enterprise value
MSCI
AAA = best CCV = worst
Green washing
Conveying a false impression/ providing misleading info about how a company products are more environmentally sound
Potential red flags
Unexplained changes in accounting policy
Unexplained transactions that boost profits
Unusual increase in trade receivables w/o change in sales - money laundering
Unusual increase in inventory in relation to sales
Increasing gap between reported profit and cash flow operations ^^^
Unexpected large write offs and impairments
ROE
Return on equity
Net income / common equity
Days receivables
Trade receivables / average revenue per day (revenue / 365)
Days inventories
Inventory/average COS per day
Current ratio
Current assets / current liabilities
Quick ratio
(Cash + trade Receivables) / current liabilities
Debt - to - equity ratio
(Current debt + non-current debt) / shareholders equity
Sustainable growth rate
B * ROE
B = earnings rentenion rate
Retention rate = 1-dividend payout ratio
Market risk premium
Around 5-7%
Cost of debt - tax rate
Use net tax rate
Firm value
Incl debt
Equity value
Exclude debt
Earnings retention ratio
1- dividend payout ratio
Financial analysts
Sell-side analysts: employed by providers of research and brokerage service
Buy-side: internally employed by assets managers
Conservatism bias
Where people emphasis original, pre-existing info over new data
Anchoring bias
Causes us to rely too heavily on the first price of info we are given about a topic
Confirmation bias
When people ignore new info that contradicts existing beliefs
Hindsight bias
being over confident about the future could affect how much you put effort you put in now
- studying - think know what’s in an exam so put less effort into it
Mental accounting bias
Metally sorting our funds into separate accounts - making it easier to over spend
Framing effect
When people make judgements in the way the info is presented, as opposed to just the facts
Availability bias
Assessing the prob of an event occurring based on previous similar situations that have happened
Emotional bias
Based on the personal feelings of an individual at the time a decision is made
Also may be deeply rooted in personal experiences that influence decision making
Self - attribution bias
Tendency to attribute successes to personal skills and failure to beyond thier control
- good grade = study hard
- bad grade = teacher hates me
Overconfidence bias
Overestimating themselves / ability
Status quo bias
People preferring that things stay the same
Regret aversion bias
The fear of making a decision because it could be wrong
Gambler fallacy
Flipping a coin, landing on heads 4 times then you will think surely next time it will land on tails
= different to previous outcomes
Hot-hand fallacy
Future outcomes will be like previous outcomes
If you roll a die a certain way, same way rolling will produce same outcome
ESG
Enviro, social & governance
Measure sustainability of a company
Sri
Socially responsible investing
Keeps in mind the enviro and social effects of investments - making possy impacts
Invest as personal you think good investment
ESG v SRI
Basically ESG focus on environmental
Sri focus on personal beliefs
Csr
Corporate social responsibility
Is the concept that a business has the responsibility to do good
NAV
Total assets - total liabilities
/ total shares
