Lecture 3&4

Question 1

Fundamental analysis: 3 parts

Answer 1

Global environment

Industry specific factors

company specific factors

Question 2

Fundamental analysis on the global economy

Answer 2

Influencing factors: Supply & demand shocks

business cycles: peak, contraction, trough, expansion…

• -> cyclical investing: high beta, fixed assets - low beta, non fixed assets
• -> leading, coincident & lagging indicators

Question 3

Fundamental analysis on the industry

Answer 3

Sensivity to business cycle: sales, operating leverage (fixed/var. costs), financial leverage

sector rotation –> outperformance according to business cycle

Porters 5 forces: Threat of entry, competition, substitutes, buyers bargaining power, suppliers bargaining power

equity valuation to identify mispriced stocks from true valuation: multiples etc.

Question 4

Tobins Q

Answer 4

Market value of assets / Replacement costs

Question 5

Limitations to book value

Answer 5

Based on original costs, not market value –> liquidation value // replacement costs

Question 6

Holding period return

Answer 6

[E(D) + E(P) - P] / P

Question 7

Required rate of return

Answer 7

CAPM k

intrinsic value: true value according to model
market value: consensus of all market participants

Question 8

Estimated dividend growth rates

Answer 8

g = ROE * b

Question 9

Dividend discount models (DDM)

Answer 9

V = d / (1+k) + d/(1+k)^2 .....
V = D(1+g) / (k-g)

Question 10

Present Value of growth opportunities

Answer 10

P = E1/k + PVGO

P/E = 1/k * (1 + PVGO/(E/k))

Question 11

Pitfalls in PE analysis

Answer 11

accounting, inflation, business cycle

Question 12

Financial statement analysis

Answer 12

Income statement: Profitability, earnings, expenses

• economic earnings: cash flow without productive cap.
• accounting e.: affected by asset valuation

Balance sheet: Financial condition

Financial statement: cash implications of transactions by accounting for the due date of CFs

Question 13

Measuring firms performance

Answer 13

ROE, ROA, ROC etc.:
Are assets used efficiently (turnover ratios)
Profitability of sales (profit margins)

Excessive leverage (debt ratios, coverage ratios)
Sufficient liquidity (cash ratios, nwc)

Question 14

ROE

Answer 14

(1-t) * [ROA + (ROA - r)(Debt/Equity)]

ROA > r Firm earns more than it pays out for creditors

Question 15

Economic value added

Answer 15

EVA = (ROA - k) * equity

Question 16

Comparability problems

Answer 16

Accounting differences (LIFO; FIFO etc.)
Inflation, real interest
mark to market
quality of earnings

Question 17

Graham technique

Answer 17

Purchase common stocks at less than their WC and deduct all liabilities in full