Module 2 Flashcards
The economy goes through an alternating periods (four phases) of ______________ and ___________.
prosperity; depression
social science that deals with the study of the allocation of scarce resources among unlimited and competing uses to satisfy human needs.
Economics
We never have enough of the resources we need to satisfy our wants completely
Scarcity
A given resource has several possible uses, and there is the constraint that we cannot possibly use one particular resource for all multiple uses all at the same time
Alternative Use
It’s either this use or the other use. In other words, there is a _______.
trade-off
loss of potential gain from other alternatives when one alternative is chosen.
opportunity cost
examines the factors that influence individual economic choices and behavior of individual households, of individual consumers, and of individual companies and markets. The study focuses on how individual markets behave in response to demand and supply of goods and services, and their prices.
Microeconomics
studies the behavior and performance of an economy as a whole. It looks at economy-wide phenomena such as inflation, price levels, rate of economic growth, national income, gross domestic product and changes in unemployment.
Macroeconomics
Business Cycle
- Expansion
- Peak
- Contraction/Recession
- Trough
___________________, measured by GDP growth, is tracked by the different phases of the business cycle
Economic growth
____________________ growth is also influenced by economic growth
Corporate earnings
Characteristics of Different Phases of the Business Cycle
table page 158 (see photos)
there is an inverse relationship between the price of a good and quantity the buyers are willing to purchase such good.
law of demand
(⬆️ price, ⬇️ demand)
whose demand decreases with the rise in income, because the buyer tends to shift his consumption to a better or superior good which he can now better afford.
Inferior Goods
The inferior good is given up for the superior good, thus reducing the demand for the inferior good.
Goods which are perceived to be alternatives to a product are called ______________.
substitute goods.
The increase in price of a good will tend to reduce the demand for it as buyers switch to substitutes.
are goods which are used jointly or consumed together, e.g. tennis racket and tennis balls; golf clubs and golf balls. A decrease in the demand of one is followed by a decrease in the demand for the other
Complementary goods
states that there is a direct relationship between the price of a good and quantity of it offered for sale.
law of supply
(⬆️ price, ⬆️ supply)
state wherein the conflicting forces of supply and demand are in balance.
EQUILIBRIUM
is a measure of the responsiveness of quantity demanded due to a change either in the price of goods or in consumer income.
Elasticity
is the degree of responsiveness of quantity demanded with respect to the market price changes
Price elasticity of demand
PED =% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑/ % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒
is the degree of responsiveness of the quantity demanded, with respect to
the change in consumer’s income.
Income elasticity of demand
is one where more of the good is demanded with an increase in income.
normal good’
There is only one producer/supplier of the good and therefore has control of supply and price. There is no close substitute to this one good, and no alternative for the buyer. There are heavy barriers to entry to the business so that there is no competition.
Monopoly
market where there is a small number of relatively large firms that produce similar, but slightly different products. But still there is very limited competition and it is because there are significant barriers to entry. It is a matter of imperfect competition.
Oligopoly
It measures the value of all goods and services by a country, regardless if it was produced within or outside the country.
Gross National Product
Measures the output generated by the labor and capital owned by the citizens of a country
Gross National Product
Measures the value of goods and services produced within a country regardless of the nationality of the persons producing such goods and services
Gross Domestic Product
Measures the output produced within the geographic borders of a country
Gross Domestic Product
2 ways to calculate GNP & GDP
- Expenditure Approach
- Income Approach
consumers who purchase final goods and services in the output market
Expenditure Approach
Expenditure Approach Formula
total expenditure ( Y )= C + I + G + X
Consumption ( C )
Investment ( I )
Government Purchases ( G )
Net Exports ( X )
Net Exports = Total Exports – Total Imports
the difference between the value of a country’s import and exports for a given period.
Balance of Trade
Balance of Trades Formula
BOT= Total value of Imports – Total value of Exports
Trade Deficit - the amount by which the cost of a country’s imports exceeds the value of its exports (IM > EX)
Trade Surplus - the amount by which the value of a country’s exports exceeds the cost of its imports (IM < EX)
focuses on payments to factors of production in the input market
Income Approach
known as the Gross National Income (GNI)
Income Approach Formula
Y = ERCIDI
Employee Compensation (E),
Retail Income (R),
Corporate Profits (C),
Interest Payment (I),
Depreciation (D),
Indirect Business (I)
NOMINAL GNP/GDP
• expressed in current pesos
• nominal return = stated interest rate
REAL GNP/GDP
- adjusted for the effects of inflation
- real return = [(1 + nominal rate)/ (1 + inflation rate)] − 1
⬆️ GNP/GDP – economy is ___________
⬇️ GNP/GDP – economy __________________
• doing well
• is not doing well
The GDP Growth Rate is at the center of economic indicators. The other major economic indicators useful to accompany GDP are (selected):
- Unemployment Rate
- Interest Rate
- The Balance of Payments
- Government Debt
- Inflation Rate
is the fraction of the labor force that cannot find jobs. These include individuals who are employable and are seeking a job but are unable to find a job.
unemployment rate
But in a macroeconomic sense, unemployment means that the full potential of labor to contribute to the economy’s production output is curtailed. It represents the inefficient use of resources. Also, the unemployed are deprived of their purchasing power, which brings about lower spending and lower output. Unemployment means a loss of human capital. And also, means less tax revenues
represents both a cost of money (to the borrower) and earnings from money (to the lender).
Interest
In a macroeconomic sense, interest rates are a significant determinant of aggregate spending in that a reduction in the interest rate raises aggregate demand.
The effect of higher interest rates may be summarized as:
- Reduced Consumption
- Reduced Investment
- Appreciation in the exchange rate; and the ultimate twin effect is
- lower economic growth
- lower inflation
economic indicator that is watched closely for various reasons. Debt is a burden because interest must be paid on the debt. A higher debt level crowds out payments for social and other services from the government’s national budget.
government debt level
The balance of payments is the record of the transactions of the residents of a country with the rest of the world. There are two main accounts in the balance of payments: the ___________ and the _____________.
current account; capital account
Consumer Price Index is an indicator of the general level of prices by measuring:
1) changes in the prices of a fixed basket of consumer goods and services; and
2) purchasing power of money.
f&b, transportation, housing, entertainment
Effects of Inflation and Deflation on Consumer Price Index
Inflation
• continuing rise in the prices of goods and services (⬆️Price, ⬇️ Purchasing Power)
• Ex: Php 1,000 today at 6% inflation rate Php 1,060 next year
Deflation
• declining prices of goods and services
• Ex: Php 1,000 today at 6% deflation rate Php 940 next year
refers to the rate of changes in the Consumer Price Index (CPI) that measures the average price of a standard basket of goods and services consumed by a typical family
Headline inflation
when the inflation rate shoots up so high to impose literally economic disaster to the population.
hyperinflation
which occurs when inflation rises while output is either falling or at least not rising.
stagflation
MONETARIST ECONOMIC THEORY
• ______________ or _________ is the major determinant of price levels
• Well-controlled, slowly increasing money supply will have the most __________ impact on the health of the economy.
• MV = PQ
• Quantity of money; money supply
• positive
M – total pesos in the nation’s money supply
V – velocity or number of times per year each dollar is different
P – average price of all the goods and services paid
Q – quantity of assets, goods, and services sold
Role of Central Bank
- Maintain economic stability by controlling money supply
- Avoid overheating and depression
This is the amount of money that exist in the economy at a given time.
Money Supply
Measures of Money Supply:
M1 =
M2 =
M3 =
M1 – money in circulation + demand deposits + travelers’ check
M2 – M1 + savings account and time deposits
M3 – M2 + deposit substitutes [assets and liabilities of financial institutions]
M1: Narrow Money
M2: Broad Money
M3: Domestic Liquidity
Money Supply: Monetary Policy
- Expansionary Monetary Policy
- Restrictive Monetary Policy
Expansionary Monetary Policy vs. Restrictive Monetary Policy
Expansionary Monetary Policy
• increase money supply
• reduce reserve requirements
• buy government securities
• lower interest rates
Restrictive Monetary Policy
• decrease money supply
• increase reserve requirements
• sell government securities
• increase interest rates
Review of Business Cycle Phases: Peaks
- Overheating of ___________ and __________
- Very low _____________
- _________________ and _____________, funded by debts
- investments; production
- unemployment
- Overexpansion; overproduction
Review of Business Cycle Phases: Trough
- Investments and production ______
- _____ unemployment
- Minimal _____
- flatten
- High
- debts
Monetarist Response to Phases of the Business Cycle
Cycle Phase: Manifestation
A. Peak
— Rapid M3 growth
— High demand driven inflation
B. Trough
— Slow M3 growth
— Low inflation, threat of deflation
Cycle Phase: Response of Central Bank
A. Peak
— Restrictive monetary policy
* ⬆️ interest rates
* ⬆️ banks’ reserve requirements
* Sell more government securities
B. Trough
—Expansionary monetary policy
* ⬇️interest rates
* ⬇️banks’ reserve requirements
* Buy more government securities
KEYNESIAN THEORY
* Economy can sometimes operate below __________
* Takes place when demand for goods is __________
* No strong automatic mechanism moves output and employment towards __________________
* Policies could be used to increase _________ (by ___________, _______________, _____________)
* Allow economy to avoid __________
* Examples: World War 2 , US response to global financial crisis
- potential output
- insufficient
- full employment levels
- demand; cutting interest rates; pump priming of the economy; investment in infrastructure
- depression
SUPPLY SIDE ECONOMIC THEORY
• Economic growth by __________ for people to produce goods and services
• Examples: Reduce taxes, reduce regulations
• lowering barriers
Evaluate internal factors by reviewing the _______________
Financial Statements
are written records that convey the financial activities and conditions of a business or entity.
Financial statements
Market Theories:
- Monetarist Economic Theory
- Keynesian Theory
- Supply Side Economic Theory
T or F. Financial Statements are the main source of financial information for major investment decisions and an indicator of how financially healthy a corporation is.
T
Financial Statements
- Balance Sheet
- Income Statement
- Accumulated Retained Earnings
- Statement of Cashflow
Review of Accounting: The Balance Sheet
• also called ________________
• reflects the _________________ of a corporation as of a specified date
• shows what the corporation owns (______), what it owes (__________), and what its net worth is (_____________).
• A corporation’s Total Assets is always equal to its _____________ and __________.
• Statement of Assets and Liabilities
• financial condition
• Assets; Liabilities, Stockholders’ Equity
• Total Liabilities and Stockholders’ Equity.
anything of monetary value that the corporation owns
Assets
Asset Category
- Current Assets
- Fixed Assets
• assets that can be converted into cash, sold, or consumed within a reasonable period of time, typically a year
• includes cash, marketable securities, inventory, accounts receivables, and supplies.
Current Assets
tangible assets used in the business that are of a permanent or relatively fixed nature such as land, buildings, machinery and equipment
Fixed Assets
financial obligations (debt) of corporation
liabilities
Liabilities Category
- Current Liabilities
- Long-Term Liabilities
• debts of the corporation that fall due within a year
• includes notes payable, accounts payable, commercial paper, and accrued expenses and taxes
Current Liabilities
• debts that are due in over a year such as bonds payable and bank loans payable.
Long-term liabilities
• residual interest in the assets of the corporation after deducting its liabilities
• Also referred to as ________ or ________.
Stockholders’ Equity
• Net Assets or Net Worth
Categories of Stockholders’ Equity
- Initial Capital
- Accumulated Profits
represents shares issued by the corporation at their par value
Capital Stock
the amount paid by stockholders in excess of the par value of each share.
Capital Surplus
the accumulated profits of the company after payment of cash dividends.
Retained Earnings
CAPITAL STOCK vs. CAPITAL SURPLUS
CAPITAL STOCK
Issued and outstanding shares x par value
CAPITAL SURPLUS
Amount paid by stockholders in excess of capital stock
Income Statement
• Also called _______________ or ______________
• summarizes the results of the corporation’s _________ for a given period of time (usually ______)
• Shows the __________ generated, _________ incurred and __________ earned by the company during such period.
Income Statement
• Statement of Operations or Profit and Loss Statement
• operations; a year
• revenues; expense; and net profits
includes return and discounts
Total Sales
Summary of cost that apply directly to the merchandise sold during the period.
Cost of Goods Sold
Reflects the basic cost structure of the product.
(Net sales - COGS)
gross profit
Salaries, advertising, communications, utilities, insurance, etc.
selling and administrative expense
Net income of the company from its main line of business.
Measures:
(1) ability to market goods and services; and
(2) ability to control expenses
Operating Income
Revenues from sources other than its main line of business
Other Income
Interest incurred from bank loans and debt securities issued
Interest Expense
Residual profit from revenues after deducting all taxes and expenses.
Net Income
It shows how the company used its profits.
Accumulated Retained Earnings
Add: Net Income —> principal addition
Less: Cash Dividends —> principal reduction
It is the summary of the cash provided and used by operating, investing, and financing activities and the aggregate effect of these activities on the cash balance during a period of time.
Statement of CF
Accounts Receivables and Loans Payable
Accounts Receivables
company was able to collect
Loans Payable
company paid off some of its debt
2 Methods of Investment Analysis
- Fundamental Analysis
- Technical Analysis
Investment Analysis Framework
p. 183 of SL (see photos)
It involves the use of traditional economic and business concepts in the examination of economic and company variables that lead to an estimate of the value of an investment, which can then be compared to the current market price of the investment.
Fundamental Analysis
Fundamental Analysis Approach
- Top-down approach
- Bottom-up approach
Top-down approach vs. Bottom-up approach
Top-down approach
Economy —> Industry —> Company
Bottom-up approach
Economy <— Industry <— Company
Fundamental Analysis: COMPANY ANALYSIS
- Qualitative
- Quantitative
Qualitative vs. Quantitative
Qualitative
— examines factors that may affect the valuation of the company
— e.g. change management, mergers & acquisitions, expansions
Quantitative
— study of the company’s financial performance & health
Quantitative Analysis
- Financial Statements
- Financial Ratios
study of the past and current financial data to estimate future risk and potential
Financial Statements
study of the relationship between items appearing on financial statements
Financial Ratios
FINANCIAL RATIOS
- LIQUIDITY RATIO
- ACTIVITY RATIO
- COVERAGE RATIO
- PROFITABILTY RATIO
It measures solvency or the ability to pay its short-term debt as they mature.
Liquidity Ratios
Liquidity Ratio
• current ratio
• quick ratio
• cash ratio
most commonly used and measures ability to cover its short-term debts
Current Ratio
= Current Assets / Current Liabilities
It is a stringer measure of solvency and includes only the company’s more liquid current assets.
Quick Ratio or Acid Test
Quick Ratio = (Cash + Marketable Securities + Receivables) / Current Liabilities
It is the most severe test of a company’s short-term debt paying ability and only includes cash and marketable securities.
Cash Ratio
Cash Ratio = (Cash + Marketable Securities) / Current Liabilities
Problem #2:
ASSETS
Cash (& Equivalents) - 1,000
Receivable - 612
Inventory - 1,000
Fixed Asset - 3,000
Total: 5,612
LIABILITIES & EQUITY
Current Liability - 1,000
Long Term Liability - 1,000
Stock Holder’s Equity - 3,612
Total: 5,612
What’s the Net Working Capital, Current Ratio, Quick Ratio, Cash Ratio?
-
Net Working Capital = Current Assets – Current Liabilities
= (1,000 + 612 + 1,000) – (1,000)
= 1,612 -
Current Ratio = Current Assets/Current Liabilities
= (1,000 + 612 + 1,000)/ (1,000)
= 2,612/1,000
= 2.6X -
Quick Ratio = (Cash & equivalents + Receivables)/
Current Liabilities
= (1,000 + 612)/1,000
= 1,612/1,000
= 1.6X
Also called acid test ratio -
Cash Ratio = Cash & equivalents/Current Liabilities
= 1,000/1,000
=1.0X
Problem #3: Given that a company has Php 2,500,000 in cash, Php 8,000,000 in inventories, Php 100,000 in marketable securities, Php 1,400,000 in accounts receivable and Php 3,000,000 in current liabilities. Compute for the current, quick, and cash ratio.
-
Current Ratio
= 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠/𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
= 12,000,000/ 3,000,000
= 4 -
Quick Ratio
= (𝐶𝑎𝑠ℎ + 𝑆𝑒𝑐𝑢𝑟𝑖𝑡𝑖𝑒𝑠 + 𝐴𝑅) / 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
= 4,000,000 / 3,000,000
= 1.33 -
Cash Ratio
= 𝐶𝑎𝑠ℎ / 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
= 2,600,000 / 3,000,000
= 0.87
Problem #4:
ASSETS
Cash (& equivalents) - 3,299
Receivable - 500
Inventory - 500
Fixed Asset - 3,000
Total: 7,299
LIABILITIES & EQUITY
Current Liability -1,000
Long Term Liability - 1,000
Stock Holder’s Equity - 5,299
Total: 7,299
Compute for:
•Net working capital
•Current ratio
•Quick Ratio
•Cash Ratio
Is Juan able to meet short term obligations?
-
Net Working Capital = Current Assets – Current Liabilities
= (3,299 + 500 + 500) – (1,000)
= 3,299 -
Current Ratio = Current Assets/Current Liabilities
= (3,299 + 500 + 500)/(1,000)
= 4,299/1,000
= 4.3X -
Quick Ratio = (Cash & equivalents + Receivables)/Current Liabilities
= (3,299 + 500)/1,000
= 3,799/1,000
= 3.8X -
Cash Ratio = Cash & equivalents/Current Liabilities
= 3,299/1,000
=3.3X
Is Juan able to meet short term obligations? YES
It measures the company’s ability to effectively manage its assets.
Activity Ratio
Purpose for studying activity ratios:
• Improve company’s ________
• _____________ ≠ cash flow
• Reduce need for _____
• Improve ability to payout ____________
• Enhance ___________
• Convert non-earning asset to _______________
• Improve ability to _________ on opportunities
• “Cash is king”
• cash flow
• Net income
• debt
• cash dividends
• profitability
• interest earning asset
• capitalize
ACTIVITY RATIO
• asset turnover
• A/R turnover
• inventory turnover
measures productivity of all assets in generating sales.
Asset Turnover
Asset Turnover = Net Sales / Total Assets
It measures efficiency in collecting receivables and managing credits.
Accounts Receivables Turnover
A/R = Credit Sales of the Year / Accounts Receivable
this indicates the average number of days it takes to collect receivables.
Average Collection Period
Average Collection Period = 365 Days / Accounts Receivable Turnover
it measures acceptability of the inventory level
Inventory Turnover Ratio
Inventory Turnover = Cost of Goods Sold / Average Inventory
Average Inventory = (Previous + Current Inventory) / 2
Problem #5: A company has Php 5.6M in net sales, Php 14.4M in credit sales with a Php 15M in total assets and AR of Php 1.25M. Compute for the Asset Turnover Ratio and A/R Turnover.
Asset Turnover Ratio
= 𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠/𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
= 5,600,000 / 15,000,000
0.37
A/R Turnover
= 𝐶𝑟𝑒𝑑𝑖𝑡 𝑆𝑎𝑙𝑒𝑠 / 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠
= 14,400,000 / 1,250,000
= 11.52
Problem #6: Seeing the poor asset management numbers, Juan decides to improve his operations. Here are the numbers for the end of year 2 and 3.
YEAR 2
Cash: 3,000
COGS: 1,000
Inventory: 1,000
Receivables: 612
YEAR 3
Cash (Sales): 4,000
COGS: 1,320
Inventory: 500
Receivables: 500
Compute for (Year 3):
* Inventory Turnover
* Days Inventory (round off to whole number)
* Receivables Turnover
* Average Collection Period (round off to whole number)
If industry average inventory turnover is 12, while average receivables turnover is 24, how does Juan compare?
-
Inventory Turnover = Cost of Goods Sold/Average Inventory
= 1,320/[(1,000 + 500)/2]
= 1,320/750
=1.76x
Compare to industry average
* If too low, either signs of overproduction or poor inventory management
* If too high, then not enough stocks to supply to buyers
-
Days Inventory = 365 days/Inventory Turnover
= 365/1.76
= 207 days -
Receivables Turnover = Sales/Average Receivable
= 4,000/[(612 + 500)/2]
= 7.19 X
Compare to industry average
* If too low, sign of inefficient collection
-
Average Collection Period = 365/ Receivables Turnover
= 365/7.19
= 51 days
Inventory turnover 1.8 < 12, poor
Receivables turnover 7.2 <24, poor
it measures the protection for the company’s long term creditors and investors.
Coverage Ratio
it illustrates the relationship between “what is owed and what is owned”
Debt to Equity Ratio
Debt to Equity Ratio = Total Liabilities/Total Owner′s Equity
(⬆️ D/E Ratio ⬆️Risk to Creditor)
Problem #7:
LIABILITIES & EQUITY
Current Liability: 1,000
Long Term Liability: 1,000
Stock Holder’s Equity: 3,612
Total: 5,612
Debt to Equity Ratio = Total Liabilities/Total Equity
= (1,000 + 1,000)/3,612
= 2,000/3,612
= 0.55X
The lower, the less risky!
it is used to measure the safety of the investment in terms of number of times interest is earned.
Times Interest Earned
Times Interest Earned = EBIT/Interest Expense
Problem #8:
JUAN’S INCOME STATEMENT
Sales: 3,000
Less: Cost of Goods Sold: 1,000
Gross Profit: 2,000
Less: Selling, Gen & Admin: Exp 1,000
Operating Profit: 1,000
Less: Interest on debt: 100
Earnings before tax (EBT): 900
Less: Taxes: 288
Net income: 612
Compute for the Times Interest Earned
Times Interest Earned = Earnings before Interest and Tax/Interest
= 1,000/100
= 10X
The higher, the better!
Problem #9: Compute for the D/E ratio and Times Interest Earned given the following figures: Php 8.5M total liabilities, Php 2.4M EBIT, Php 55M total equities, and Php 400K interest expense.
- D/E Ratio
= 𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠/𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑖𝑒𝑠
= 8,500,000/55,000,000
= 0.1545 -
Times Interest Earned
= 𝐸𝐵𝐼𝑇/𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒
= 2,400,000/400,000
= 6
*Considered safe if interest is earned 2x or more
Problem #10:
JUAN’S BALANCE SHEET (Year 3)
ASSETS
Cash: 3,299
Receivable: 500
Inventory: 500
Fixed Asset: 3,000
Total: 7,299
LIABILITIES & EQUITY
Current Liability: 1,000
Long Term Liability: 1,000
Stockholder’s Equity: 5,299
Total: 7,299
JUAN’S INCOME STATEMENT (Year 3)
Sales: 4,000
Less: Cost of Goods Sold: 1,320
Gross Profit: 2,680
Less: Selling Gen. & Admin Expenses: 1,000
Operating Profit: 1,680
Less: Interest on debt: 100
Earnings before Tax (EBT): 1,580
Less: Taxes: 506
Net income: 1,074
Compute for:
1. Debt to Equity (round off)
2. Times Interest Earned
a. Debt to Equity Ratio = Total Liabilities/Total Equity
= (1,000 + 1,000)/5,299
= 2,000/5,299
= 0.38X
b. Times Interest Earned = Earnings before Interest and Tax/Interest
= 1,680/100
= 16.8X
it measures the company’s viability or profitability.
Profitability Ratio
Profitability Ratio
• return on assets
• return on equity
• profit margins
• EPS and P/E
company’s ability to generate profits using all the resources
Return on Assets (ROA)
Return on Assets = (EBIT/Total Assets) x 100%
it measures the return on investment by the stockholders.
Return on Equity (ROE)
Return on Equity = (Net Income/Stockholders′Equity) x 100%
Measures how much a company earns on top of cost to produce goods
Gross Profit Margin (GPM)
Gross Profit Margin = (Gross Profit/Net Sales) x 100%
indicator of the business risk for a company and reflects both cost structure and ability to control operating expenses.
Operating Profit Margin (OPM)
Operating Profit Margin = (Operating Profit/Net Sales) x 100%
Measures how much a company earns on top of ALL costs
Net Profit Margin (NPM)
Net Profit Margin = (Net Income/Net Sales) x 100%
it’s the most commonly used indicator of a company’s profitability. If the EPS increases, it’s a sign that a company is growing.
EARNINGS PER SHARE (EPS)
Earnings Per Share = (Net Income −Preferred Dividend Requirements)/Outstanding Shares of Common Stocks
shows the relationship between a stock’s price and the company’s EPS.
PRICE-EARNINGS RATIO (P/E Ratio or PER)
Price Earnings Per Share = (Market Price per Common Share/Earnings Per Share (EPS))
it is expressed as a percentage of a current share price.
DIVIDEND YIELD
Dividend Yield = (Cash Dividends per Common Share/Market Price per Common share)
Problem #11: Given the income statement for Year 3, compute for the gross profit margin, operating profit margin, net profit margin. If average stock holders’ equity for Year 3 was Php4,762, compute for gross profit margin, operating profit margin, net profit margin and return on common equity.
JUAN’S INCOME STATEMENT (Year 3)
Sales 4,000
Less: Cost of Goods Sold 1,320
Gross Profit 2,680
Less: Selling General & Admin Expenses 1,000
Operating Profit 1,680
Less: Interest on debt 100
Earnings before Tax (EBT) 1,580
Less: Taxes 506
Net income 1,
-
Gross Margin (GPM) = Gross Profit/Net Sales
= 2,680/4,000
= 67% -
Operating Profit Margin (OPM) = Operating Profit/Net Sales
= 1,680/4,000
= 42% -
Net Profit Margin (NPM) = Net Profit/Net Sales
= 1,074/4,000
= 27% -
Return on Common Equity (RCE) = (Net Income-Preferred Dividends)/Average Common Equity
= (1,074 – 0)/4,762
= 23%
Valuation Measures (and formula)
- Earnings per Share (EPS) = (Net Income – Preferred Dividend)/Outstanding Shares
- Book Value per Share (BV) = (Assets – Liabilities–Preferred Stocks)/Outstanding Shares
- PE ratio = Price/EPS
- P/BV ratio = Price/BV
- Dividend Payout Ratio (DP) = Dividend per Common Share/Earnings per Share
- Dividend Yield = Dividend per Common Share/Price
Problem #12:
JUAN’S BALANCE SHEET (Year 1)
ASSETS
Cash 1,612
Inventory 1,000
Fixed Asset 3,000
Total: 5,612
LIABILITIES & EQUITY
Current Liability 1,000
Long Term Liability 1,000
Stock Holder’s Equity 3,612
Total: 5,612
JUAN’S INCOME STATEMENT (Year 1)
Sales 3,000
Less: Cost of ice cream 1,000
Total: 2,000
Less: Salary of vendor 1,000
Less: Interest on debt 100
Total: 900
Less: Taxes 288
Net income: 612
O/S 1,000 shares
Compute for the valuation measures
-
Earnings per Share (EPS) = (Net Income – Preferred Dividend)/Outstanding Shares
= (612 – 0)/1,000
= 0.612 -
Book Value per Share (BV) = (Assets – Liabilities–Preferred Stocks)/Outstanding Shares
= (5,612 – 2,000 – 0)/1000
= 3,612/1,000
= 3.612 -
PE ratio = Price/EPS
Assuming someone offered to buy Juan’s ice cream for Php6.20/share, what is the implied P/E?
PE ratio = 6.20/0.612
= 10 X -
P/BV ratio = Price/BV
What is the implied P/BV?
P/BV ratio = 6.20/3.62
= 1.7X -
Dividend Payout Ratio (DP) = Dividend per Common Share/Earnings per Share
If Juan pays out Php0.31/share in dividends, what is the dividend payout ratio?
Dividend Payout Ratio (DP) = 0.31/0.62
= 50% -
Dividend Yield = Dividend per Common Share/Price
What would be the dividend yield at the offer price of Php6.20/share?
Dividend Yield = 0.31/6.20
= 5%
Problem #13:
JUAN’S BALANCE SHEET (Year 3)
ASSETS
Cash 3,299
Receivable 500
Inventory 500
Fixed Asset 3,000
7,299
LIABILITIES & EQUITY
Current Liability 1,000
Long Term Liability 1,000
Stockholder’s Equity 5,299
7,299
JUAN’S INCOME STATEMENT (Year 3)
Sales 4,000
Less: Cost of Goods Sold 1,320
Gross Profit 2,680
Less: Selling General &
Admin Expenses
1,000
Operating Profit 1,680
Less: Interest on debt 100
Earnings before Tax (EBT) 1,580
Less: Taxes 506
Net income 1,074
Compute for:
1. EPS
2. BV
-
Earnings per Share (EPS) = (Net Income – Preferred Dividend)/Outstanding Shares
= (1,074 – 0)/1,000
= 1.07 -
Book Value per Share (BV) = (Assets – Liabilities–Preferred Stocks)/Outstanding Shares
= (7,299 – 2,000 – 0)/1000
= 5,299/1,000
= 5.30
Problem #14: Assuming that Juan is planning to pay out a cash dividend of Php0.50/share on EPS of Php1.07, and someone offered to buy his company for Php15/share, compute for:
• P/E
• P/BV
• Dividend payout (percentage)
• Dividend yield (percentage)
-
PE ratio = Price/EPS
= 15/1.07
= 14 X -
P/BV ratio = Price/BV
= 15/5.299
= 2.8X -
Dividend Payout Ratio (DP) = Dividend per Common Share/Earnings per share
= 0.50/1.07
=47% -
Dividend Yield = Dividend per Common Share/Price
= 0.50/15.00
= 3.3%
This is the study of past market data (“history repeats itself”) in an attempt to predict future price movements of individual stocks or of the market as a whole.
Technical Analysis
Technical Analysis
• Analysis of ____________ to estimate _________
• Believes that _______ are affected by numerous factors
• Aside from fundamental factors, prices are affected by ________ and _______________
• past market data; future price
• prices
• psychology; sentiment of investors
The DOW Theory
• Touted by ___________, father of ______ analysis
• Combines ______ and _______ information to analyze both ____________ and the ______________.
• Aside from the fundamental factors, prices are affected by _______ and ________________
• Charles Dow; technical
• price; volume; individual stocks; overall stock market
• Aside from the fundamental factors, prices are affected by psychology and sentiment of investors
the price range at which there is an increase in the supply of a stock and any price increase will reverse it abruptly.
Resistance Level
A resistance level tends to develop after a stock has experienced a steady _______ from a ________________. The decline in price leads some investors who acquired the stock at a higher price to look for an opportunity to ____ near their _________________. When the price rebounds to the resistance level, the overhanging supply of stock comes to the market and dramatically ______ the price increase on heavy volume.
decline; higher price level
sell; breakeven points
reverses
the price range at which there is a substantial increase in demand for a stock.
support level
• Generally, a support level will develop after a stock has enjoyed a meaningful ___________ and the stock has begun to experience some ____________.
• Investors who did not ____ during the _____________ will be waiting for a __________ to buy into the stock. When the price reaches the _______ level, demand surges and price and volume begin to ______ again.
• price increase; profit-taking
• buy; first price increase; “second chance”; support; increase
Resistance: Time to _____
Support: Time to _____
sell
buy
Characteristics of Bullish Market
- The Dow Jones Industrial Average, the Dow Jones Transportation and the Dow Jones Utility indices are all trending ________ (the Dow theory)
- Rising ________
- More ___________ than ________ (positive market breadth, advance/decline ratio>1)
- _______ are trending higher (_____the moving averages)
- The reverse would indicate a ____________
- higher
- volumes
- advancers; decliners
- Shares; above
- bearish market
an investment style that goes against prevailing market trends buying poorly performing assets and then selling when they perform well.
contrarian investor or contrarian
examples of contrarian indicators
— Rising number of odd lot transactions
— falling short interest ratio
— contrarian investing near market tops
used as an indicator of the long-run trend and current prices are examined relative to this trend for signals of change.
Moving Average Lines
ratio of the price of the stock relative to the value for some stock market series or index.
Relative Strength Ratio
⬆️ RS-Ratio – stock is _____________ the market
⬇️ RS-Ratio – stock is _______________ the market
outperforming
underperforming
The DOW Theory
- Support and Resistance Level
- Moving Average Lines
- Relative Strength Ratio
shows daily, weekly, monthly, or yearly time series of stock prices.
Charting
Charting
- Bar Charting
- Candlestick Charting
Emphasizes between closing price and prior closing price.
Bar Charting
Emphasizes between opening and closing price.
Candlestick Charting
Theories Against Technical Analysis
Efficient Market Hypothesis
Efficient Market Hypothesis
• Market is _______________
• Market reflects all ______________
• No one can consistently achieve excess ______________
• Price follows a _______
• Study of __________________ is useless
• information efficient
• available information
• above market average
• random walk
• past price action (technical analysis)
Rules for Managing a Portfolio
• Establish an ______________
• Select _________ methodically and professionally
• _________ as funds become available
• Hold until a ___________________ appears
• Keep _______ and ___________
• Monitor holdings _______
• _________ securities holding
• investment plan
• purchases
• Invest
• definite reason for selling
• accurate; complete records
• regularly
• Diversify
Establishing an Investment Plan
• Understand _______________
• ____________ and _____________
• investor requirements
• Objectives and Constraints
Establishing an Investment Plan
- Safety
- Current Income
- Capital Appreciation
- Liquidity
Safety vs. Current Income vs. Capital Appreciation vs. Liquidity
Safety
- Does the investor have work?
- Does the investor have adequate savings?
- How old is the investor?
- What is the temperament of the investor?
Current Income
- Does the investor have work?
- Does the investor need income from the portfolio to maintain his lifestyle?
Capital Appreciation
- How much does the investor hope to attain during the investment time horizon?
Liquidity
- Does the investor have work?
- Does the investor need income from the portfolio to maintain his lifestyle?
- Does the investor expect to make a major purchase in the near term?
Understanding the Individual Investor
Factors affecting the portfolio of individual investors
Dependents: None | Many
Age: Young | Old
Financial resources: Large | Small
Risk Tolerance: High | Low
Types of investments: Aggressive (more stocks) | Conservative (more bonds)
Income characteristics: Employed or self-employed
Temperament: Risk seeker or risk averse
Taxation: -
Ability to supervise investments: -
Understanding the Institutional Investor
- Corporation
- Pension/Retirement Funds
- Banks
- Insurance Companies
- Investment Companies
Corporation
• High _____________
• Invest in securities that offer slightly _________ than ___________, ______, ___________
• liquidity requirement
• higher returns; savings account; T-bills; time deposits
Pension/Retirement Funds
• Generally have ____________
• Invested in a ________ of investment products
• long time horizon
• wider array
Banks
• Funds available for investment have ____ ; example: _______________, ______________
• Invest on the ____________
• High ___________
• cost; interest on deposits; reserve requirements
• basis of spreads
• liquidity requirements
Insurance Companies
• Classic __________
• _______ liquidity requirements
• Invest in a __________ pool of investments
• long term investor
• Minimal
• diversified
Investment Companies
Investment objectives and policies dictate _______________, _______________ and ________________.
return expectations; liquidity requirements; diversity of investments
Rationale behind Institutional Investor
• Reduce ____
• Match financial goals with appropriate _________________
• risk
• investment product
Other Qualified Investors
- Natural Person
- Juridical Person
Annual gross income of at least Php 10M or
Total portfolio investment of at least Php 10M or
personal net worth not less than Php 30M
QIB: Natural Person
Gross Assets of at least Php 100M or
Total portfolio investment of at least Php 60M
QIB: Juridical Person
Entity, Corporation, Partnership or Trust with total assets of at least ________ are also considered qualified investors.
Php 1.20 B
Non-Qualified Investors may participate through the service of a _______, _____________, or _____.
broker; investment house; bank
Customer Account Information Form
- Customer’s Name, Address (present & permanent)
- Date & Place of Birth
- Nationality
- Signature of Salesman introducing the account
- Specimen Signature
- Whether the customer is an institutional customer
- Option whether the confirmation would be via courier, facsimile, or electronic
- If a corporation, partnership, or legal entity, the names authorized to transact
must be updated every 2 years
Client Agreement
• Full name and address of the client
• Full name and registered address and registration status of the Broker Dealer
• Undertakings by the Broker Dealer
• Description of the nature of services to be provided
• Description of any remuneration
• Risk disclosure statement
• Statements regarding any other important circumstances
Types of Diversification
- By Asset Class
- By Industry
- By Tenor
- By Geography
• Mechanisms that aid in the transfer of goods and services between buyers and sellers
• Does not necessarily need a physical location
Markets
T or F. Market is a place where buyers and sellers trade goods or services or commodities for an agreed price.
T
Organized Marketplace
- exchange
- over-the-counter market
- alternative trading system
Trading in the secondary market can be done through an __________ or “_________________.
Exchange; “Over-the-Counter” (OTC).
is the market created by the buying and selling of a security on a bilateral basis between parties that takes place outside of an exchange or Alternative Trading System (ATS).
over-the-counter market
OTC vs. Exchange
OTC
* stocks can come in non- standardized variations, trade can be done in flexible quantities or volume, and so price and executions quality varies.
* heavy price competition in the nature of its “flexibility” which allows custom-fitted transactions.
Exchange:
* certain listing criteria to meet to which smaller companies may not qualify, so these go to the OTC market.
* strict disclosure requirements
* fees charged
a securities market has a demand side where corporate issuers issue securities which they ____ to raise funds they need and demand. On the opposite side is a
supply side consisting of investors who have the funds to supply and ____ the securities.
sell; buy
Characteristics of a Good Market
- Transparent
- Liquid
- Internally efficient
- Externally or Informational Efficient
Timely and accurate information available on prices, volume, and supply and demand
Transparent
Marketability, Price Continuity, Depth
Liquid
• Marketability: Prompt execution of trades
• Price continuity: At a price close to the last trade
• Depth: Have numerous potential buyers and sellers
Low transaction cost
Internally efficient
Price to adequately reflect all inflation available regarding supply and demand factors
Externally or Informational Efficient
Characteristics of a Good Market
(STOCK MARKET & PROPERTY MARKET)
SL page 244, refer to photos
Other Characteristics of a “Good” Market
- adequate supply of securities (available for trading which offer potential good returns or otherwise can be said to have “investment quality.”)
- adequate number of Issuers to produce that supply of securities
- adequate number of sellers of securities
- adequate number of buyers or investors
- organized marketplace (to implement transactions in a fair and orderly manner)
Types of Markets
- Money Market
- Capital Market
Highly liquid, ST fixed income instruments (T-bills, commercial paper, bank certificates of deposits)
Money Market
Market for LT securities
Capital Market
Capital Market
Stock Market - Equities
Bond Market - LT Debts
The general organization of the securities market can be described by the way it is broadly classified by segment as:
- Money Market
- Capital Market
- Derivatives Market
- Foreign Exchange Market
is a component of the financial market with dealings in short term maturities of financial contracts. Generally, financial instruments with maturities of less than one year are included here.
Money Market
T or F. Most money market instruments are equity securities.
F. Most money market instruments are fixed-income debt instruments.
a segment of the financial market with dealings in long-term debts instruments, such as bonds; or in equities which represent proportionate interests in the ownership of a corporation, such as common shares or stocks.
Capital Market
includes all financial contracts deriving their value from any underlying assets, more popularly including options, futures, forwards, and swaps.
Derivatives Market
T or F. Government Securities are issued by the Bureau of Treasury (BTr) and is done by auction. Only Government Securities Dealers duly accredited (GS Dealers) participate in the auction which is conducted through auction tenders and auction awards all by electronic system.
T
T or F. Under the Local Government Code, Local Government Units (LGUs) are unauthorized to issue bonds.
F. Under the Local Government Code, Local Government Units (LGUs) are authorized to issue bonds as their respective Sanggunians may approve.
The sale of securities by an issuer to fewer than twenty (20) persons in the Philippines during any twelve-month period” is an exempt transaction (Section 10, SRC) and does not need to be registered with the SEC.
private placement
(typically handled by an Underwriter)
Kinds of Market
- Primary Market
- Secondary Market
- Third Market
- Fourth Market
Where new issues of bonds, preferred stock or common stock are sold by government, municipalities and companies to acquire new capital
Primary Market
- Permit trading in outstanding issues
- Provide liquidity for securities issued in the primary market
- Usually conducted in an exchange or a centralized market for secondary trading of stocks, bond and other securities
Secondary Market
T or F. In the secondary market, what is traded are already-issued securities, and the cash proceeds from the sale of secondary shares go to the selling investor. In the primary market, the proceeds go to the issuer of the securities.
T
Involves dealers and brokers who trade shares that are listed on an exchange away from the exchange; Also referred to as over the counter or OTC trading
The third market
Direct trading of securities without broker intermediation
Fourth Market
When the corporate Issuer of securities, also called the Originator, issues its securities to be sold to the public, this action is called an _________________________, more commonly associated with public offering of shares of stock.
Initial Public Offering or an IPO
Market Participation
- Broker
- Dealer
- Qualified Investors
members of self-regulatory organizations who are recognized by a broker / dealer / OTC
Qualified Investors
There is also a special kind of participation called __________ a.k.a. _________ that act as both a broker and dealer.
market maker; specialists
is an organization that enforces fair, ethical, and sufficient practices in the securities and commodities market.
Self Regulatory Organization (SRO)
Broker Participation: AUTO ORDERBOARD
• LIMIT ORDER
• FILL or KILL
• FILL and KILL
• ICEBERG
orders are intended to be matched on an automatic basis are queued and executed.
AUTO ORDERBOARD
the ones that is entered with a specified limit which may be expressed in terms of price or yield.
Limit Order
one that is entered with a specific yield or price with the intention of having the entire amount executed at the indicated price.
Fill or Kill
entered with a specified yield or price with the intention of being matched at the indicated price, and withdrawn with respect to the unmatched volume.
Fill and Kill
order that is entered with the intention of having the same in tranches.
Iceberg
Broker Orders
- SOLICITED
- UNSOLICITED
- DISCRETIONARY ACCOUNT
if order is mentioned or ordered first by salesmen.
Solicited
if the order is mentioned by the customer regardless of who initiated the communication.
UNSOLICITED
broker / dealer effecting transaction on behalf of the client without the client’s specific authorization but shall be specified on the Client Agreement.
DISCRETIONARY ACCOUNT
Confirmation of Customer Orders
Broker / Dealer shall report all transactions entered into for the customer’s account by:
- COURIER
- FACSIMILE TRANSMISSION
Order Ticket
• Time
• Subsequent Action
• Terms and Conditions
• Whether the transaction will be matched through the Auto Order Board
• Name of Customer
• Name of Salesmen who took the order
• Price executed
• Whether the order was solicited or unsolicited
Important Dates
- Not later than 30 days Filing SEC Form – period where a resignation or discontinuation of a salesman or associated person shall be provided to the Commission
- 15 days after each quarter – wherein Associated Person must prepare, sign, and file with the Commission of a Compliance Report
- SRC RULE 28 - rules covering Registration of Salesmen and Associated Persons
Important Statements
- Monthly Statements
- Quarterly Statements
- Excused from Sending Statements
frequency of sending a statement to the customer by Broker Dealer
MONTHLY Statement
a broker dealer may issue statement whose accounts (1) have not been traded for 1 year (2) a written request made by the customer
QUARTERLY Statement
EXCUSED FROM SENDING STATEMENT
after three attempts the mails are returned and:
• 3 YEARS – if not traded, considered dormant accounts and are required to be turned over to the Commission
• 10 years – the commission can hold the client’s security position and disposed pursuant to escheat proceedings.
broker dealer should always prioritize their orders even though member broker, stockholders, etc. is pre-existing.
Customer First policy on client’s orders
Call and Continuous Market
Call Market
• auction or order driven
• centralize: orders matched by a facilitating agent
• execution at one price
• used for the opening or during resumption after trading is suspended
Continuous Market
• dealer or quote driven
• decentralized: numerous dealers provide liquidity
• trades occur at any time market is open
Index
• It measures the ________________ of a group of securities
• Act as a ___________ – judge the performance of investment managers
• __________________ on effect of macroeconomic factors on security prices and to compare risk-adjusted performance of alternative classes
• Perform ___________________________ of the entire class of assets
• average performance
• benchmark
• Perform research
• technical and fundamental analysis
Index Uses
• Perform technical and fundamental analysis of the _____________
• Serve as the ____________ for measuring beta and systematic risk
• entire class of assets
• “market” portfolio
Types of Indices (Based on Index Weightings)
- Price-Weighted Averages
- Market Value-WeightedIndices
- Equal-Weighted Indices
arithmetic mean of current prices; biased towards high priced stocks
Price-Weighted Averages
formula see pic
sum of the market value of all stocks; biased towards high market capitalization
Market Value–Weighted Indices
(formula see pic)
Observations
• Biased towards _______________________
• More adequately reflects performance of _______________ (which underweight, equal weight, overweight relative to the index)
• highest market capitalization
• large institutional portfolios
T or F. Equal–Weighted Indices Compute yearly percentage price change for each security in the index and then averaging the results
F. Equal–Weighted Indices Compute day-to-day percentage price change for each security in the index and then averaging the results
• Influence of small capitalizations = large capitalizations
• Appropriate benchmark for portfolio with equal dollar amount invested in each of several stocks
• Employed by many individual investors
• Unlike the others, cannot be used for buy and hold strategy
Equal–Weighted Indices
Risk of Global Investing
- Currency risk
- Country risk
• Sovereign risk
• Political risk - Geographic risk
• Ex. Typhoons, Earthquake - Regional risk
• Ex. Asian financial crisis, European financial crisis
Risk of Global Investing
- Unfamiliarity with _________
- Regulatory concerns
— policies on _____________, ______________, ___________ - Transaction cost
— ______________, _______________ - ___________
- foreign markets
- repatriation of proceeds; capital and currency controls; ownership limitations
- communication costs; cost of transferring funds
- Taxation
Drivers of Corporate Earnings
- Internal Factors
- External Factors
Internal Factors vs. External Factors
External Factors: (outside of company’s control)
• Economic conditions
• Industry developments
Internal Factors: (within company’s control)
• Strategy
• Management capability
- The SRO is an organization that enforces fair, ethical, and sufficient practices in thensecurities and commodities market.SRO stands for?
a) Self Regulation Organization
b) Self Regulatory Organization
c) Self Regulation Office
d) Self Regulatory Office
b) Self Regulatory Organization
- The SRC rule that covers Registration of Salesmen and Associated Persons.
a) SRC Rule 3
b) SRC Rule 10
c) SRC Rule 15
d) SRC Rule 28
d) SRC Rule 28
- The following are qualified investors except:
a) Banks
b) Insurance Company
c) Entity, Corporation, Partnership, or Trust with total assets of Php 1B
d) None of the above
c) Entity, Corporation, Partnership, or Trust with total assets of Php 1B
Customer Account Information Form contains the basic information of the client. It must be updated every:
a) 2 years
b) 3 years
c) 4 years
d) 5 years
a) 2 years
The type of indices that is biased towards high market capitalization.
A) Weighted Averages
B) Market Value
C) Equal Weighted Indices
D) None of the above
B) Market Value
This index computes the day-to-day percentage price change for each security in the index and then averages the results
a. Price – weighted averages
b. Market value - weighted indices
c. Equal weighted Indices
c. Equal weighted Indices
This index computes the arithmetic mean of current prices
a. Price – weighted averages
b. Market value - weighted indices
c. Equal weighted Indices
a. Price – weighted averages
This is where the Influence of small capitalizations = large capitalizations
a. Price – weighted averages
b. Market value - weighted indices
c. Equal weighted Indices
c. Equal weighted Indices
This index is biased towards highest market capitalization
a. Price – weighted averages
b. Market value - weighted indices
c. Equal weighted Indices
b. Market value - weighted indices
Which index more adequately reflects performance of large institutional portfolios (which underweight, equal weight, overweight relative to the index)
a. Price – weighted averages
b. Market value - weighted indices
c. Equal weighted Indices
b. Market value - weighted indices
Unfamiliarity with foreign markets
Currency risk
Regulatory concerns: policies on repatriation of proceeds, capital and currency controls, ownership limitations
Country risk
• Sovereign risk
• Political risk
Transaction cost: communication costs, cost of transferring funds
Geographic risk
• Ex. Typhoons, Earthquake
Taxation
Regional risk
• Ex. Asian financial crisis, European financial crisis
Which institutional investor has high liquidity requirements?
a. Insurance companies
b. Corporations
c. Pension/Retirement funds
b. Corporations
Which institutional investor will most likely have the biggest portion of stocks in its portfolio?
a. Insurance companies
b. Corporations
c. Banks
Which institutional investor will most likely have the biggest portion of stocks in its portfolio?
a. Insurance companies
b. Corporations
c. Banks
