Equities

Question 1

What are the major categories of equity valuation models?

Answer 1

1. Discounted CF (PB model)

stock value is estimated as the PV of cash distributed to shareholders (DDM or cash avaliable to shareholders after necessary capital expenditures (FCFE()

2. Multiplier models

a. the ratio of stock price to such fundamentals as earnings (P/E), sales, book value, or cash flow per share is used to determine if a stock is fairly valued
b. The second type of multiplier model is based on the ratio of enterprise value to either earnings before interest, taxes, depreciation, and amortization (EBITDA) or revenue. Enterprise value is the market value of all a firm’s outstanding securities minus cash and short-term investments

3. Asset baased models

In asset-based models, the intrinsic value of common stock is estimated as total asset value minus liabilities and preferred stock.

Question 2

Calculate Enterprise value

Calculate Equity

Answer 2

MV Stock
MV Equity
- Cash

EV - Debt + cash

Question 3

Calculate Leverage Factor

Answer 3

1 / Margin %

Question 4

Calculate leveraged return

Answer 4

HPR x Leverage factor

Question 5

calculate margin call price

Answer 5

p0 (1- initial margin %)
/
1- maintenance margin %

aka

What they paid
/
1- maintenance margin

Question 6

What factors do you need to take into acocunt when calculating ROI with maregin?

Answer 6

1. Sale proceeds
2. Loan
3. margin interest
4. dividends recieved
5. sale proceeds

Question 7

how do you turn a leverage ratio into a %

Answer 7

1 / ratio

Question 8

How do you recalculate an index divisor?

How is this then used?

Answer 8

New value
/
old value

New index prices after split
/
new divisor

Answer 9

Classical: no business cycles only temporary disequilibria, change in AD is caused by change in technology => we dont need to do anything, the economy will auto adjust itself

Keynesian: business cycles are caused by expections: Underproducing when over-pessimistic and overproducing when over-optimistic. Wages input is downward-sticky, meaning it will take sometimes for businesses to re-act to changes in AD. => We need government intervention

New Keynesian: same as above + other inputs prices are also rigid

Monetarists: business cycles are caused by external shocks and inappropriate policies from monetary authorities. => We need to keep the money supply grows at a stable rate and predictable

Australian: business cycles are caused by government intervention. For ex, interest rate is reduced, businesses invest alot and those investments perform poorly => the whole economy contracts

New Classical: now recognize business cycles and incorporate utility theory in micro into them. Basically, they say that business cycles are caused by external shocks and change in technology (not monetary variables). They are efficient market responses so we don’t need to do anything (no gov. interventions)

Riccardian Equivalence - govt debt funding for business cycles does not impact ecoomic performance as this is offset in the long run. Technology only factor.