Topic 3 - Equity Analysis

Question 1

Value investors use fundxxxxxl anxxxxxs to identify stocks that are mispriced relative to some measure of “true” value that can be derived from observable financial data.

Answer 1

Fundamental Analysis

Question 2

True or False…
Shareholders are sometimes called “residual claimants“…

Answer 2

It’s true.

Question 3

The liquxxxxxxn vaxxe is the net amount that could be realised by selling the assets of a firm after paying the debt

Answer 3

Liquidation Value
This is a good representation of the “floor” for the stock’s price

Question 4

What is Tobin’s q / Q Ratio ?

Answer 4

Question 5

What is the Holding Period Return (HPR) ?

Answer 5

The HPR is the total return on an asset or investment portfolio over the period for which the asset or portfolio has been held.

The holding period return can be realized if the asset or portfolio has been held, or expected if an investor anticipates the purchase of the asset.

Question 6

What does this formula calculate?

Answer 6

Expected HPR.

• The return on a stock is composed of cash dividends and capital gains or losses
• The expected HPR may be more or less than the required rate of return
  Variation based on the stock’s risk

Question 7

In what circumstances is it most important to use multistage DDMs rather than constant-growth models?

Answer 7

It is most important to use multistage DDMs when valuing companies with
temporarily high growth rates. These companies tend to be companies in the early phases of their life cycles, when they have numerous opportunities for reinvestment, resulting in relatively rapid growth and relatively low dividends (or, in many cases, no dividends at all). As these firms mature, attractive investment opportunities are less numerous so that growth rates slow.