IF_L3 Flashcards
1
Q
What is Common Stock?
A
- Definition: Ownership shares in a publicly held corporation
- Primary Market: Where new shares are issued
- Secondary Market: Where existing shares are traded
2
Q
What are Valuation by Comparables methods?
A
- P/E Ratio = Price per share ÷ Earnings per share
- P/B Ratio = Price per share ÷ Book value per share
- Compares similar firms to determine a fair price
3
Q
How is the Dividend Discount Model (DDM) expressed?
A
-
DDM formula:
P0 = Σ [DIVt ÷ (1 + r)t] - For constant growth:
P0 = DIV1 ÷ (r − g)
4
Q
What is the Expected Return on a stock?
A
- Expected Return (r) = Dividend Yield + Growth
- Can also be called the market capitalisation rate
5
Q
Define Book Value and Dividend
A
- Book Value: Net worth of the firm according to its balance sheet
- Dividend: Periodic cash distribution from the firm to its shareholders
6
Q
How do you compute Present Value (PV) of future dividends?
A
- Sum of discounted future dividends + discounted sale price
- Example: P0 = (DIV1 + P1) / (1 + r)
7
Q
What is the Ploughback Ratio and how does it relate to growth?
A
- Ploughback Ratio: Fraction of earnings reinvested
- Growth (g) = Return on Equity × Ploughback Ratio
8
Q
What is PVGO (Present Value of Growth Opportunities)?
A
- PVGO = Difference in stock value with and without growth
- Reflects net present value of future investments
9
Q
Explain the Free Cash Flow (FCF) valuation approach
A
- Discount future FCFs at the required rate
- Add the horizon value (terminal value) to the discounted near-term FCFs
10
Q
Define Market Capitalisation Rate (r)
A
- The required return on the equity
- Used to discount future dividends or FCFs
11
Q
Differentiate Primary vs Secondary Market
A
- Primary: New shares sold directly by the company
- Secondary: Existing shares traded among investors
12
Q
What is an Electronic Communication Network (ECN)?
A
- A computer network that connects traders directly
- Allows buy and sell orders to be matched automatically
