Valuing Stocks Flashcards
1
Q
What is the formula for EPS?
A
EPS=net income / no. Of shares
2
Q
What is the formula for P/E?
A
P/E=market share price/EPS
3
Q
What is P/B formula?
A
P/B=market share price/book share price
4
Q
What is the benefit to valuation by comparables?
A
- useful for companies with no stock price
5
Q
What are the limitation of valuation by comparables?
A
- huge variation on P/E ratios
- negative P/E ratios
- infinite P/E ratios (usually occurs for start-ups where earnings =0)
6
Q
What is the cost of equity?
A
- expected return demanded by investors in the company’s stock
7
Q
What is the opportunity cost of capital?
A
- expected return on other securities with the same risks as the company’s stock
8
Q
Describe growth stocks
A
- investors have expectations of capital gains
- expect future growth of earnings
- expect to gain much higher price in the future
- stock price keeps growing along with earnings
- PVGO accounts for substantial fraction of stock price
9
Q
Describe income stocks
A
- investors don’t expect high capital gains
- investors expect stable dividends
- PVGO accounts for small fraction of stock price
10
Q
What is PVGO?
A
Present value of growth opportunities- net present value of all investments company is expected to make in the future
11
Q
What are the limitations of DDM?
A
- uncertain dividend forecasts
- not all stocks pay dividends
12
Q
What is the usefulness of valuation based on FCF?
A
- firms pay out cash by repurchases or repurchases÷nds
- valuing private companies
- can be used on division of company
13
Q
What is FCF?
A
- after tax cash flow generated by the company’s operations after subtracting investment required for growth
14
Q
In DDM if no earnings are reinvested what is the equation for stock price
A
- no plowback
- earnings=dividends
P0=earnings/r
15
Q
What is the horizon value using P/E?
A
PVH=P/E X earnings (H+1)
