Equity Investments Flashcards
What is the rational of the Dividend Discount Model?
Intrinsic value of stock is the present value of its future dividends.
When does one receive a margin call?
(Original Price)*(1-initial margin)/(1-maintenance margin) Initial margin determines the amount of the loan.
(1-maintenance margin) is the proportion of allowable loan. By adding the portion of maintenance margin, one can determine when to receive a margin call.
What does operational efficiency refer?
It refers to low transaction cost in a securities market.
What does informational efficiency refer?
Prices change rapidly to reflect new information without predictable bias and rates of return are, on average, proportional to risk.
What is price-weighted index
Simple arithmetic average of prices.
What is the characteristics of the market capitalization-weighted index?
It has weights based on the market capitalization of each index stock (current stock price multiplied by the number of shares outstanding) as a proportion of the total market capitalization of all the stocks in the index.
Required Rate of Return could be expressed as ?
Beta*Risk-free rate+ market risk premium
What is sustainable growth?
ROE*(1-Dividend payout ratio)
Which technique is appropriate for valuing shares of a firm that does not pay dividends?
Free cash flow-based technique.
What is the characteristics of the shakeout industry life-cycle stage?
Slowing (but still positive) growth, intense competition, and declining profitability as demand begins to approach market saturation.
What is the characteristics of the decline industry?
Negative growth.
What is P/E ratio?
Price/ Earnings ratio is a firm’s stock price divided by earnings per share. dividend payout ratio/(k-g). k is required rate of return. g is constant dividend growth rate. (retention rate*ROE).
What is cyclical firms?
Firms whose profit is very sensitive to changes in over all growth.
