4. Stock Valuation

Question 1

What does stock valuation depend on?

Answer 1

1. Inflation rate
2. Default risk
3. Opportunity cost

Question 2

What is a defensive stock?

Answer 2

• A defensive stock is a stock that provides consistent dividends and stable earnings regardless of the state of the overall stock market. There is a constant demand for their products, so defensive stocks tend to be more stable during the various phases of the business cycle.
• Examples: FMCG (P&G), Pharma (Moderna)

Question 3

What is a cyclical stock?

Answer 3

• A cyclical stock is a stock that’s price is affected by macroeconomic or systematic changes in the overall economy. … Most cyclical stocks involve companies that sell consumer discretionary items that consumers buy more during a booming economy but spend less on during a recession.
• Examples: Volkswagen

Question 4

What is a counter-cyclical stock?

Answer 4

• Countercyclical stocks are stocks whose prices tend to move opposite to the overall business cycle.

Question 5

What are ways to value stocks?

Answer 5

3 ways:
1. Dividend Discount Model (DDM)
2. Discounted Cashflow Model
(DCF)
3. Multiples

Question 6

Formula: Dividend Discount Model

Answer 6

• Assuming the stock is worth the sum of all of its future dividend payments, discounted back to their present value
• Model: see notes

Question 7

Formula: Discounted Cash Flow

Answer 7

• See notes: 2 models

Question 8

CAPM model

Answer 8

• See notes

Question 9

Multiples: what are some metrics used to compare?

Answer 9

price-to-earnings (P/E), price-to-book (P/B), price-to-sales (P/S), price-to-cash flow (P/CF), and many others. Of these ratios, the P/E ratio is the most commonly used.