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CFP EXAM - Giauque Flashcards > IP - Chapter 11 - Equity Securities Valuation* > Flashcards

IP - Chapter 11 - Equity Securities Valuation* Flashcards

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1
Q

Price an investor believes a stock is worth based on fundamental analysis

A

Intrinsic Value

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2
Q

Two broad types of common stock valuation models for going concerns are?

A

1) Absolute Value

2) Relative Value

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3
Q

A business that is expected to continue operations indefinitely

A

Going concern

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4
Q

What is ‘absolute value’ common stock valuation?

A

Identifies a stock by its intrinsic value (based on PV of future cashflows)

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5
Q

What is ‘relative value’ common stock valuation?

A

Compares the firms stock price to other similar companies

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6
Q

What is an example of absolute value common stock valuation?

A

Dividend Discount Model

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7
Q

What is an example of relative value common stock valuation?

A

PE Ratio

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8
Q

An absolute valuation of common stock technique that attempts to point estimate of future cash flows discounted at an appropriate discount rate today?

A

Present Value Model

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9
Q

Limited operational business life (ie. typewriter company)

A

Not a going concern

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10
Q

How are companies that are not a going concern valued?

A

FMV of companies assets minus FMV of companies liabilities

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11
Q

What is the Basic Present Value Model formula that calculates the value of a security today?

A

CF1 / ((1 + Discount Rate) ^ Year)

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12
Q

What model allows for growth rates to change over time?

A

Two Stage Dividend Growth Model

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13
Q

Companies in the S&P 500 that have increased their dividends consistently over the last 25 years.

A

Dividend Aristocrats

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14
Q

V = D1 / (r - g)

A

Constant growth dividend model (ON CFP FORMULAS SHEET)*

V = Value of Stock
D1 = Dividend per share (also computed as D1(1+g))
r = required return of investor
g = dividend growth rate
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15
Q

r = (D1/P) +g

A

Constant Growth Dividend Model when given a price

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16
Q

In theory, a firms operating cashflow can only grow if:

A

1) Operating Cashflows increase

2) External Financing

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17
Q

Measure of cashflow to be paid to shareholders

A

FCFE (Free Cashflow to Equity)

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18
Q

Means identical assets should sell for identical prices

A

Law of 1 Price

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19
Q

What are 4 common relative valuation methods?

A

PE Ratio, Price to Book, Price to Sales, PEG Ratio

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20
Q

What are ratios like PE and P to B also referred to as?

A

Multiples

21
Q

Amount of money investors are willing to pay for a single dollar worth of earnings

A

PE Ratio

22
Q

What is another formula for PE Ratio?

A

(D1 / E) / (r - g)

23
Q

This ratio is a measure of PE Ratio per unit of EPS Growth

A

PEG Ratio:

PE Ratio / EPS Growth

24
Q

(Total Market Value Price X Shares Outstanding) / (Sales)

A

Price to Sales Ratio

25
Q

Undervalued firms typically have low ___________ ratios?

A

Price to Book

26
Q

This model estimates cash flows the security is likely to pay and them discounts them at the appropriate interest rate to find value?

A

Basic Present Value Model

27
Q

This model computes value as the present value of an infinite growing dividend stream?

A

Dividend Discount Model

28
Q

This model helps to estimate a firms intrinsic value per share?

A

Constant Growth Dividend Model

29
Q

How can a firms dividend growth rate be estimated ? (2 ways)

A

1) Retention Ratio

2) Firms Return on Equity

30
Q

How is preferred stock valued?

A

Using the zero growth rate assumption in the dividend discount model

(ie. V = D1(1+g) / (r - g)… setting g = 0 makes V = D1/r)

31
Q

This model assumes that a firms dividends grow at DRAMATICALLY/EXTREMELY different rates during a high growth period that is followed by an infinite normal growth period.

A

Two stage dividend discount model

32
Q

The expected future selling price in the two stage dividend discount model?

A

Terminal Price

33
Q

Dividend discount model in which dividends change GRADUALLY from a high growth rate to a low normal growth over a period of years.

A

H Model

34
Q

For firms that either do not pay dividends or for firms that pay dividends that are substantially different than its earnings, __________ can be used as an input variable in a present value model to estimate intrinsic value.

A

Free Cash Flow

35
Q

Cash available to common share holders after the firms bond-holders and preferred share holders have been paid?

A

Free Cash Flow to Equity

36
Q

The most commonly used relative valuation measure?

A

Price to Earnings Ratio

37
Q

Lower ratios of this imply undervaluation?

A

PEG Ratio

38
Q

How do you calculate PEG Ratio?

A

PE Ratio/EPS Growth Rate

39
Q

Ratio of a firms stock price to its revenues per share

A

Price to sales ratio

40
Q

Ratio of a firms stock price to its cashflow per share

A

Price to cash flow ratio

41
Q

PE Ratio based on expected 12 months of earnings

A

Leading PE Ratio

42
Q

PE Ratio based on trailing 12 months of earnings or the most recent four quarters.

A

Trailing PE Ratio

43
Q

These values can be estimated using the present value approach even though they have different types of cashflows?

A

Both Stock Values and Bond Values

44
Q

If the market price of a firms stock is less than its intrinsic value the stock is most likely to be _______________ .

A

Undervalued

45
Q

This approach is appropriate for natural resource firms.

A

FMV approach

46
Q

When utilizing the constant dividend growth model you must first solve for what?

A

Growth rate (ie. Interest rate) using financial calculator

47
Q

BE SURE TO KNOW CFP GIVEN FORMULA SHEET!

A
48
Q

How to calculate required rate of return if it is not given in a problem?

A

Use CAPM Formula to solve

–> RFR + Beta(Market Return - RFR)

CFP EXAM - Giauque Flashcards (21 decks)

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