Flashcards in Business 6: Financial Valuation Deck (44)

1

## What is an annuity?

### Series of equal CFs to be received over a # of periods

2

## How do you calculate the PV of an annuity?

###
= PMT

* ( 1 - [ 1 / (1+r)^t ] / r)

3

## Does does an annuity due occur?

### Beginning of period

4

## When does an ordinary annuity occur?

### End of period

5

## A perpetuity is also known as what?

### Zero growth stock

6

## What is a perpetuity?

### Period CFs paid by an annuity that lasts forever

7

## How do you calculate a perpetuity?

###
= stock value per share

= price

= dividend / required return

8

## What is another name for the Gordon model?

###
- Dividend Discount Model (DDM)

- Constant Growth DDM

9

## What model assumes that the dividend payments are the CFs of an equity security and that the intrinsic value of the company's stock is the PV of the expected future dividends?

### Gordon model

10

## How do you calculate the price of the stock using the Gordon model?

###
= D1

/ (R-G)

11

## How do you determine the required rate of return?

###
CAPM

= Rf + B (Rm - Rf)

12

## What do price multiples represent?

### Ratios of a stock's market price to another measure of fundamental value per share

13

## What do investors use price multiples to evaluate?

###
- Price of stock AND

- Determine if it undervalued, fairly valued, or overvalued

14

## Why is the P/E ratio the most widely used multiple when valuing equity securities?

###
- Earnings is key driver of investment value

- Changes in company's P/E tied to long run stock performance of that company

15

## How do you calculate the P/E ratio?

###
= P0 / E1

= Price today / EPS expected in one year

16

## How do you value the stock with the P/E ratio?

### = [P0/E1] * E1

17

## When past earnings are used in the P/E ratio, what is the name of the ratio calculated?

### Trailing P/E

18

## When expected earnings are used in the P/E ratio, what is the name of the ratio calculated?

### Forward P/E

19

## When is the trailing P/E the preferred calculation method?

### When co. forecasted earnings unavailable

20

## When is the forward P/E the preferred calculation method?

### When co. historical earnings not representative of its future earnings

21

## How do you calculate the trailing P/E ratio?

###
= P0 / E0

= Price today / EPS for the past year

22

## What does the PEG ratio show?

###
Price-earnings growth

- effect of earnings growth on a co. P/E

- assuming a linear relationship b/w P/E and growth

23

##
True or false.

Generally stocks with higher PEG ratios are more attractive to investors than stocks with lower PEG ratios.

### FALSE (lower PEG = more attractive)

24

## How do you calculate the PEG ratio?

###
= (P0 / E1) / G

= (Price today / Expected earnings in a year)

/ (100 * expected growth rate)

25

## How would you value stock with the PEG ratio?

###
= PEG * E1 * G

= PEG

* Expected earnings in one year

* (100 * Expected growth rate)

26

## Which ratio is more volatile: price to sales ratio OR P/E ratio?

### P/E ratio

27

## Which is more subject to manipulation: earnings OR sales?

### Earnings

28

## How do you calculate the price-to-sales ratio?

###
= P0 / S1

= Price today / Expected sales in a year

29

## How do you value equity with the price-to-sales ratio?

### = (P0 / S1) * S1

30

## What does empirical research show about changes in a company's P/CF ratios over time?

### Positively related to changes in a co. LT stock returns

31

## How do you calculate the P/CF ratio?

###
= P0 / CF1

= Price today / Expected CF in a year

32

## How do you value equity with the P/CF ratio?

### = (P0 / CF1 ) * CF1

33

## Which price multiple is used by analysts that focus on the B/S versus the I/S or statement of CF?

### Price-to-book ratio

34

## What is the rationale for using the P/B ratio?

###
- firm's BV of common equity is more stable that EPS

- esp. when firm's EPS is extremely high or low for a given period

35

## How do you calculate the P/B ratio?

###
= P0 / B01

= Price today / BV of common equity today

36

## How do you value equity with the P/B ratio?

###
= (P0 / B01) * B0

= (Price today / BV of common equity today)

* Book value of common equity today

37

## What type of finance examines investor behavior and how this behavior affects financial markets?

### Behavioral finance

38

## Behavioral biases often distort what?

### Judgement

39

##
What is the name of this behavioral bias:

"erroneous belief that the financial manager has control over valuation outcomes that are ultimately the result of market forces"

### Illusion of contrl

40

## What is the most common model used for valuing options?

### Black-Scholes Model

41

## David wants to buy shares of Epoch Corporation. If he uses a zero growth model, a desired rate of return of 20% and a dividend of $10, what was Epoch's price?

###
$50

= Dividend / Required return

= $10 / 0.20

42

## A company's PEG ratio is 4x and its current EPS is $10. Growth is expected to be 2.5%. What's the projected stock price?

###
$102.50

( = PEG * E1 * G)

( = 4 * 10.25 * 2.5)

43

## Which valuation technique can be adapted to start up companies and other situations where earnings are very low?

### Price-Sales ratio

44