IP - Chapter 10 - Equity Securities Analysis* Flashcards
Two approaches to fundamental analysis of equity securities?
Bottom up approach
Top Down Approach
How does the bottom-up approach analyze an equity security?
1) Company
2) Industry
3) Economy
How does the top-down approach analyze an equity security?
1) Economy
2) Industry
3) Company
Most important variables to consider of economic analysis when evaluating equity securities?
1) GDP
2) Inflation
3) Interest Rates
4) Unemployment
What is the fundamental analysis equity securities approach favored by analysts?
Top Down Approach
Expresses general levels of price changes in the economy?
Inflation Rate
Basket of consumer goods is represented by what?
CPI
What are the 3 primary goals of the FED?
1) Maintain long term economic growth
2) Maintain Price Levels
3) Maintain full Employment
What kind of policy does the Federal Reserve implement?
Monetary Policy
What are the tools utilized by the Federal Reserve to implement monetary policy?
1) Reserve Requirement
2) Discount Rate/Fed funds rate
3) Open Market Operations
4) Excess Reserve Deposits
What is the percentage reserve requirement for banks?
10%
The interest rate that the Fed charges financial institutions for short term loans?
Discount Rate
How much higher is the discount rate or federal LENDING rate than banks charge each other to borrow?
1% Higher
This is also called the bank to bank lending rate
Federal Funds Rate
They selling and buying of U.S. Treasuries by the Federal Reserve?
Open market operations
What happens when the Federal reserve is tightening policy?
The SELLING of US Treasuries
What happens when the Federal reserve is loosening policy?
The buying of US Treasuries by the Federal Reserve
The Federal Reserve pays interest to banks for keeping an ____________________ .
Excess Reserve
Reserves above or in excess to the minimum requirement of deposits held with the Federal reserve.
Excess Reserve
If the Fed wants to “tighten” what will happen to the interest rate that they pay for excess reserves?
Interest Rate will increase (ties more money up)
What type of policy does Congress utilize?
Fiscal Policy
What are the 3 ways Congress implements Fiscal Policy?
1) Taxes
2) Government Spending
3) Deficit Management
What are the 3 goals of Congress when utilizing Fiscal policy?
1) Maintain price levels
2) Maintain employment
3) Maintain long term economic (GDP) growth
(Same as Federal Reserves goals)
What are the 5 stages of an industry life-cycle?
1) Pioneering Development
2) Rapid Growth
3) Mature Growth
4) Market Maturity
5) Market Decline
Porters 5 competitive forces?
1) Rivalry
2) New Entrants
3) Threat of substitutes
4) Bargaining Buyers
5) Bargaining Sellers
What is the current ratio?
Current Assets / Current Liabilities
What is the quick ratio or acid test ratio?
(Current Assets - Inventories) / Current Liabilities
What is the debt ratio?
Total Debt / Total Assets
Formula for Gross profit margin?
(Sales - COGS) / Sales
This profitability ratio considers costs of goods sold but not other costs.
Gross Profit Margin
What is the formula for profit margin?
Net Income / Sales
This profitability ratio is the percent of each sale resulting in net income
Profit Margin
Return on equity formula?
Net Income / Equity
What 3 formulas make up Return on Equity?
Profit Margin, Asset Turnover, Financial Leverage
Measures the number of advancing stocks versus the number of declining stocks
Market Breadth
How is the payout ratio calculated?
Dividends per share / Earnings per share
An advancing stock is one that ________________________ .
Closes higher than the previous days close.
A declining stock is one that __________________________________ .
Closes lower than the previous day close
Described as arithmetic mean of stock prices, 10 prices used to calculate the average, shows less volatility than a series of prices
Moving Average
These ratios measure coverage of short term liabilities
Liquidity Ratios
These types of ratios measure efficiency
Asset Management Ratios
These types of ratios measure long term solvency
Leverage Ratios
These types of ratios measure the ability of a firm to generate earnings
Profitability Ratios
The method of disaggregating ROE into three basic components: profit margin, asset turnover, and financial leverage.
DuPont Formula
Profit margin formula
Net Income / Sales
Asset Turnover Formula
Sales / Total Assets
Financial Leverage Formula
Assets / Equity
Technical analysis is driven by …
Supply and Demand
The process of using publicly available information regarding a financial securities cash flows to estimate the intrinsic value of the security
Fundamental Analysis
What are two important liquidity ratios?
Current Ratio and Quick Ratio
The degree of ________________ measures the sensitivity of a firm to change in operating income on earnings per share.
Financial Leverage
The degree of _______________ is a combination of the degrees of operating and financial leverage.
Total Leverage
The degree of _______________ measures the sensitivity of a firm to changes in sales and operating income.
Operating Leverage
