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Investment Planning > Stock Valuation and Ratio Analysis (Lesson 4) > Flashcards

Stock Valuation and Ratio Analysis (Lesson 4) Flashcards

1
Q

What does the constant growth dividend discount model do

A
  • Values a company’s stock by discounting the future stream of cash flows

V = (D1/ (r-g)

r = required return

g = Dividend growth rate

D1 = Next periods dividend

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2
Q

If the required rate of return decreases the stock price will ____

A

increase

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3
Q

If the dividend is expected to increase the stock price will ____

A

increase

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4
Q

If the required rate or return _____ the stock price with decrease

A

increases

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5
Q

If the dividend is expected to decrease the stock price will ____

A

decrease

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6
Q

How do you use the dividend discount model with uneven cash flows

A
  • Use the CFj keys
  • inflate the dividend by the uneven growth rate and then find you intrinsic value with the uneven growth rate of the dividend times the normal growth rate
  • in the last year add the uneven growth rate dividend to the intrinsic value calculated above
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7
Q

What are the disadvantages of the dividend discount model

A
  • model requires a constant, perpetual growth rate of dividends
  • many stocks do not pay dividends
  • 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
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8
Q

What does the Price to Earnings ratio represent

A
  • how much an investor is willing to pay for each dollar of earnings
  • measure of the relationship between a stock price and its earnings
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9
Q

When is a P/E ratio a useful tool

A
  • when a stock pay no dividends
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10
Q

What is the formula for P/E and Price per share using P/E

A
  • P/E = Price per share / EPS
  • Price per share = P/E x EPS
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11
Q

What does the PEG ratio do

A
  • the Price/Earnings to Growth ratio compares a stocks P/E ratio to the company’s 3 to 5 year growth rate in earnings
  • PEG Ratio = SP / 3 to 5 Year growth rate in earnings
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12
Q

What is the 3 to 5 year growth rate

A
  • the historical earnings growth rate
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13
Q

What does the PEG ratio used to determine

A
  • used to determine if the stocks P/E ratio is keeping pace with the firms growth rate in earnings
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14
Q

What does a PEG ratio equal to 1 suggest

A
  • that the stock is fairly valued because the P/E ratio is in line with the earnings growth rate
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15
Q

What does a PEG ratio greater than 1 suggest

A
  • that the stock price is fully valued (or even overvalued) because an expanding P/E ratio is contributing to the stock price appreciating more than the growth rate of earnings
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16
Q

What does a firms book value represent

A
  • the amount of stockholders equity in the firm or how much the company’s shareholders would receive if the firm was liquidated
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17
Q

What does a book value significantly greater the stock price mean

A
  • indicates that the firm is overvalued
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18
Q

What is the dividend payout ratio and what is the formula

A
  • the relationship between the amount of earnings paid to shareholders in the form of a dividend relative to earning per share
  • Dividend payout ratio = (Common stock dividend) / (Earnings per Share)
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19
Q

The higher the dividend payout ratio means the company is

A

mature

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20
Q

What does the return of equity measure

A
  • the overall profitability of a company
  • Direct relationship between ROE, earnings and dividend growth
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21
Q

What is the ROE formula

A

ROE = (Earnings per Share) / (Stockholders Equity per share)

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22
Q

What is the dividend yield formula

A

Dividend Yield = Dividend / Stock Price

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23
Q

What does dollar cost average allow an investor to do

A
  • Invest the same dollar amount on a periodic basis, typically monthly
  • Investor essentially buys high and sells low
24
Q

How do you calculate the average price per share

A
  • APPS = Total Cost / Number of shares
25
Q

What is fundamental analysis the process of

A
  • conducting ratio analysis on the balance sheet and income statement to determine future financial performance and a forecasted stock price based upon that future financial performance
26
Q

What does ratio analysis include

A
  • calculating liquidity, activity, profitability, and common stock measurements
27
Q

What economic data would be looked at during fundamental analysis

A
  • Inflation, interest rates, GDP, and unemployment
28
Q

What does fundamental analysis believe

A
  • stock price performance is largely driven by the financial performance of the firm
29
Q

What does fundamental analysis assume

A
  • Investors can determine reliable estimates of a stocks future price behavior
  • Some securities may be mispriced
30
Q

What does technical analysis the process of

A
  • charting and plotting a stocks trading volume and price movements
  • analysis of trading volume and price movements will predict the future direction of stock prices long before fundamental analysis will
31
Q

Does technical analysis involve ratio analysis or analysis of financial statements

A
  • No that is fundamental analysis
32
Q

What do technical analysts believe drive a stock price

A
  • supply and demand
33
Q

What is resistance on a stock graph

A
  • may develop when investors who bought on an earlier high may now view this as a chance to get even
  • some may see it as an opportunity to take a profit
34
Q

What is support on a stock graph

A
  • may develop when a stock goes down to a lower level of trading because investors may choose to act on a purchase opportunity that they previously passed
  • is a signal that new demand is coming into the market
35
Q

(Tools of Technicians)

Charting

A
  • Plotting historical stock prices to determine a pattern
  • Plotting 50-, 100-, or 200- day moving average along the historical stock price
36
Q

(Tools of Technicians)

Market Volume

A
  • Insight into investor sentiment
  • high volume, market goes up that’s a positive indicator of investor sentiment
  • high volume, market goes down that’s a negative indicator regarding investor sentiment
  • low volume, market goes up, negative indicator regarding investor sentiment
  • low volume, market goes down, positive indicator regarding investor sentiment
37
Q

(Tools of Technicians)

Short Interest

A
  • The number of shares sold short gives insight into the future demand for a stock
  • High short interest indicates pent up demand
38
Q

(Tools of Technicians)

Odd Lot Trading

A
  • trades less than 100 shares
  • A contrarian indicator that asserts small investors are most likely wrong regarding their trades so do the opposite of the individual investor
39
Q

(Tools of Technicians)

The Dow Theory

A
  • signals an end to a bull or bear market
  • does not indicate when it will happen it just confirmed that it has ended
40
Q

(Tools of Technicians)

Breadth of the Market

A
  • measures the number of stocks that increase in value verse the number of stocks that decline in value
41
Q

(Tools of Technicians)

Advance Decline Line

A
  • the difference between the number of stocks that closed up versus the number of stocks that decreased in value
42
Q

What is the Efficient Market Hypothesis

A
  • Investors cannot consistently achieve above average market returns
  • prices reflect all information that is available and change very quickly to new information
  • stock prices will follow a random walk
  • investors that believe in EMH believe a passive investment strategy is appropriate (buy and hold index)
43
Q

What is the Random Walk Theory state

A
  • Stock prices resemble a random walk
  • prices are unpredictable but not arbitrary
  • Impossible to achieve above market returns
  • prices reflect the all available information and true reflection of the value of that security
  • Prices are in equilibrium
  • price changes reflect a change in needs of investors
44
Q

What are the three forms of the Efficient Market Hypothesis

A
  • Weak form
  • Semi-Strong form
  • Strong Form
45
Q

What is the Weak form of the Efficient Market Hypothesis

A
  • Historical information will not help achieve above average market return
  • Technical analysis does not help
  • Fundamental analysis does help
  • Security prices reflect all price and volume data
46
Q

What is the Semi Strong form of the Efficient Market Hypothesis

A
  • Both historical and public information will not help investors
  • Technical and Fundamental analysis does not work
  • Inside information is the only thing that will help
47
Q

What is the Strong form of the Efficient Market Hypothesis

A
  • Historical, public, and private information will not help
  • Reflects all available information and react immediately to any new information
  • Inside information does not help
  • Should invest in index funds
48
Q

What are market anomalies

A
  • are exceptions to the rule that markets are truly efficient
  • Do not support the EFH in any of the three forms
49
Q

(Market Anomalies)

January Effect

A
  • January tends to be a better month to invest
50
Q

(Market Anomalies)

Small Firm Effect

A
  • Small caps tend to outperform large caps
51
Q

(Market Anomalies)

Value Line Effect

A
  • Stocks that receive a Value line highest ranking of 1 outperform stocks that receive the lowest ranking 5
52
Q

(Market Anomalies)

P/E Effect

A
  • Stocks with low P/E tend to outperform stocks with a high P/E
53
Q

What does the active investment strategy believe

A
  • investors believe the markets are inefficient
  • Investors can achieve above average market returns through active investing and market timing
54
Q

What does the passive investment strategy believe

A
  • believe the markets are efficient
  • difficult to achieve above average market returns
  • passive buy and hold strategy is best such as: laddered bonds, ETFs, barbell bonds, UITs and index investing
55
Q

What is a Strategic asset allocation

A
  • involves assessing the likely outcomes for various allocation mixes between asset classes
  • done every few years
  • is an active allocation strategy
56
Q

What is a tactical asset allocation

A
  • is an active allocation strategy whereby the investor determines expected returns for asset classes, then rebalances the portfolio to take advantage of the expected return
  • Performed frequently
57
Q

The expected rate of return provides an investor with

A

An approximation of the rate of return that a given security, meeting certain levels of pricing and dividends, may be expected to provide

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