Stock Valuation And Ratio Analysis Flashcards
How do stock prices move relative to expected rate of return?
Relative to dividends?
Stock prices move opposite expected rate of return.
Stock prices move with dividends.
Disadvantages of the dividend discount model.
- It requires a constant, perpetual rate of growth of dividends.
- It cannot compute the value of a stock that doesn’t pay dividends.
- The growth rate of dividends cannot be greater than the expected return, and the security price becomes very sensitive to the expected return when nearing the growth rate.
Price to Earnings Ratio
How do you use this ratio to compute stock price?
- Used to value stocks that don’t pay dividends.
- Price/share ÷ earnings per share. PPS ÷ EPS
- Stock price = P/E ratio x EPS.
What is the PEG ratio?
What is it used for?
PEG = PE ratio ÷ 3 to 5 years growth in earnings.
3-5 yr. growth rate = historical earnings growth rate.
If PEG = 1, PEG > 1 means stock is fully valued, maybe even over-valued.
What is a firm’s book value?
What is its usefulness?
Book value = amt of stock holder’s equity in firm, ie, how much shareholders would receive if the company were liquidated.
If book value per share is ≥ stock price, stock price may be undervalued.
What is the dividend payout ratio?
What does it indicate?
DPR is the % of earnings paid out in dividends, or dividend ÷ EPS.
Mature companies have higher DPR.
A high DPR may mean dividend is about to be reduced.
A low DPR may mean dividend will increase, thereby increasing the stock price.
What is Return on Equity (ROE)?
EPS ÷ Stockholder’s equity per share.
What is the dividend yield formula?
DY = div. ÷ stock price.
What is dollar cost averaging?
An investor strategy of investing the same dollar amount every month, thereby buying more shares when the price is low.
What is Fundamental Analysis?
What does it use?
An investment strategy that picks stock by analyzing their financial position though ratio analysis of their balance sheet and income statement, and overall economic conditions, such as inflation and interest rates, GDP, and unemployment.
FA assumes this is what drives stock performance, and this analysis can find undervalued stocks.
It uses financial statements and economic data.
What is technical analysis?
What does it use?
- Analyzes stocks by trading volume and price movements.
- Believes supply and demand of a stock drive a stock price.
- Uses charting, market breadth, and Dow theory
What is the ‘weak form’ of the efficient market hypothesis?
- historical information will not help investors beat the market, thus rejects technical analysis.
- holds that security prices reflect all price and volume data, so you can’t beat the market with more price and volume data.
- holds that prices don’t necessarily reflect financial analysis and inside information, and that these can beat the market.
What is the “semi-strong form” of the efficient market hypothesis?
Holds that price reflects all public information, and markets can only be beaten with inside information.
What is the strong form of the efficient market hypothesis?
Prices reflect all information, and the market cannot be beaten.
What is ‘strategic asset allocation’?
What is tactical asset allocation?
An asset allocation strategy that assesses likely outcomes for various asset classes and re-mixes every 5 years.
Tactical asset allocation is essentially the same thing, but re-balanced much more frequently.
