Equity

Question 1

Q: What are the three main functions of the financial system?

Answer 1

A: 1. Facilitate saving, borrowing, raising equity capital, managing risks, and trading assets.
2. Determine returns (interest rates) that equate savings supply with borrowing demand.
3. Allocate capital to its most efficient uses.

Question 2

Q: How does the financial system help entities manage risk?

Answer 2

A: It allows entities to hedge risks related to interest rates, currency fluctuations, and commodity prices through instruments like forwards, futures, options, and insurance contracts.

Question 3

Q: How do individuals and firms use the financial system for savings and borrowing?

Answer 3

A: - Individuals save for retirement or future needs using stocks, bonds, and certificates of deposit.

Firms save for future expenditures and borrow for capital projects.
Governments issue debt to fund expenditures.

Question 4

Q: What are the different types of financial markets?

Answer 4

A: - Primary Market: For newly issued securities.

Secondary Market: Where existing securities are traded.
Money Market: For short-term debt securities (≤1 year).
Capital Market: For long-term debt and equity securities.
Spot Market: For immediate asset delivery.
Derivatives Market: For futures, forwards, and options contract

Question 5

Q: What are the major types of financial securities?

Answer 5

A: - Debt Securities: Bonds, notes, commercial paper.

Equity Securities: Common stock, preferred stock, warrants.
Pooled Investment Vehicles: Mutual funds, ETFs, hedge funds, asset-backed securities.

Question 6

Q: What are the main types of financial intermediaries?

Answer 6

A: - Brokers & Dealers: Facilitate trading and provide liquidity.

Securitizers: Pool assets and sell interests in them.
Depository Institutions: Banks and credit unions that take deposits and make loans.
Insurance Companies: Manage risk through insurance products.

Question 7

Q: How does the financial system determine returns?

Answer 7

A: Interest rates are set to balance borrowing and lending. Low rates increase borrowing and decrease saving, while high rates do the opposite. Equilibrium rates vary based on risk, liquidity, and maturity.

Question 8

Q: What are commodities and real assets, and how are they traded?

Answer 8

A: - Commodities: Traded in spot, forward, and futures markets (e.g., gold, oil, wheat).

Real Assets: Include real estate, equipment, and infrastructure. They can be held directly or through REITs and other investment vehicles.

Question 9

Front: What is a long position in an asset?

Answer 9

Back: An investor has a long position when they own an asset or have the right or obligation to purchase an asset. Investors who are long benefit when the asset price increases.

Question 10

Front: How does a short sale work?

Answer 10

Back: In a short sale, an investor borrows an asset, sells it, and later repurchases it to return to the lender. The goal is to profit if the asset price declines.

Question 11

Front: What is a margin loan and how does leverage affect returns?

Answer 11

Back: A margin loan allows investors to borrow funds to buy securities. Leverage magnifies gains and losses, as returns are calculated based on the equity portion of the investment.

Question 12

Front: What is the leverage ratio and how is it calculated?

Answer 12

Back: The leverage ratio is the value of the asset divided by the investor’s equity. Example: If the initial margin requirement is 40%, the leverage ratio is
1
/
0.40
=
2.5
1/0.40=2.5.

Question 13

Front: What costs are associated with short selling?

Answer 13

Back: Short sellers must pay interest on borrowed shares, return dividends (payments-in-lieu), and maintain margin deposits. Institutional investors may receive a short rebate.

Question 14

Which of the following is most similar to a short position in the underlying asset?

A)
Buying a put.

B)
Writing a put.

C)
Buying a call.

Answer 14

Explanation
Buying a put is most similar to a short position in the underlying asset because the put increases in value if the underlying asset value decreases. The writer of a put and the holder of a call have a long exposure to the underlying asset because their positions increase in value if the underlying asset value increases. (Module 39.2, LOS 39.e)

Question 15

Q: What is the bid-ask spread, and why is it important?

Answer 15

A: The bid-ask spread is the difference between the bid price (price a dealer will buy a security) and the ask price (price a dealer will sell a security). It represents the dealer’s compensation for providing liquidity.

Question 16

Q: What is the main difference between market orders and limit orders?

Answer 16

A: Market orders execute immediately at the best available price, while limit orders specify a maximum price to buy or a minimum price to sell, ensuring better price execution but with the risk of not being filled.

Question 17

Q: What are the primary and secondary markets?

Flashcard 4

Answer 17

A: The primary market is where new securities are issued, such as IPOs. The secondary market is where previously issued securities trade among investors.

Question 18

Q: How do quote-driven, order-driven, and brokered markets differ?

Answer 18

A: - Quote-driven markets: Dealers provide bid-ask quotes.

Order-driven markets: Buyers and sellers submit orders that are matched based on rules.
Brokered markets: Brokers find counterparties for transactions, often in less liquid assets.

Question 19

Q: What are stop-loss and stop-buy orders, and how do they work?

Answer 19

A: - Stop-loss order: A sell order triggered when the price drops to a certain level to limit losses.

Stop-buy order: A buy order triggered when the price rises to a certain level, used to limit losses on short positions or confirm price momentum.

Question 20

Q: What are the key characteristics of a well-functioning financial system?

Answer 20

A: A well-functioning financial system is operationally efficient (low transaction costs), informationally efficient (prices reflect fundamental value), and has complete markets that allow saving, borrowing, hedging, and trading efficiently.

Question 21

In which of the following types of markets do stocks trade any time the market is open?

A)
Exchange markets.

B)
Call markets.
Incorrect Answer
C)
Continuous markets.

Answer 21

Explanation
Continuous markets are defined as markets where stocks can trade any time the market is open. Some exchange markets are call markets where orders are accumulated and executed at specific times. (Module 39.3, LOS 39.j)

Question 22

Which of the following would least likely be an objective of market regulation?

A)
Reduce burdensome accounting standards.
Correct Answer
B)
Make it easier for investors to evaluate performance.
Incorrect Answer
C)
Prevent investors from using inside information in securities trading.

Answer 22

Explanation
Market regulation should require financial reporting standards so that information gathering is less expensive and the informational efficiency of the markets is enhanced. (Module 39.3, LOS 39.l)

Question 23

Q: What is a security market index?

Answer 23

A: A security market index represents the performance of an asset class, market, or market segment. It is created as a portfolio of constituent securities and has a numerical value based on their market prices.

Question 24

Q: What are key considerations in index construction and management?

Answer 24

A: Index providers must decide:

The target market
Which securities to include
Weighting method
Rebalancing frequency
When to review selection and weighting

Question 25

Q: What are the different weighting methods for stock indexes?

Answer 25

A: - Price-weighted: Arithmetic average of stock prices (e.g., DJIA). Equal-weighted: Equal allocation to all securities, requiring frequent rebalancing. Market-cap weighted: Weights based on market capitalization (e.g., S&P 500). Float-adjusted market-cap weighted: Weights based on publicly available shares. Fundamental-weighted: Weights based on financial metrics (e.g., earnings, dividends).

Question 26

Q: How do market-cap and equal-weighted indexes differ?

Answer 26

A: - Market-cap weighted: Large companies influence index more (momentum bias). Equal-weighted: Small companies have larger influence; requires rebalancing. Example: If Stock A (small cap) doubles, it affects the equal-weighted index more than a market-cap weighted index.

Question 28

Choices that must be made when constructing a security market index least likely include whether to: A) use a nominal or interval scale. B) measure the performance of an entire market or market segment. Incorrect Answer C) weight the securities equally or by some firm-specific characteristic.

Answer 28

Explanation To be useful, a security market index must have a numerical value. Selecting the target market and determining the weighting method are among the choices that must be made when constructing a securities index. (Module 40.1, LOS 40.a, 40.c)

Question 29

LOS 40.f: Rebalancing vs. Reconstitution .

Answer 29

1️⃣ What is index rebalancing? Rebalancing adjusts the weights of securities in a portfolio back to target weights after price changes. It is mainly an issue for equal-weighted indexes and is done periodically (usually quarterly). 2️⃣ What is index reconstitution? Reconstitution involves adding or removing securities from an index to maintain its intended characteristics. Securities are removed if they no longer meet criteria, and new ones are added. This process affects stock prices due to portfolio managers adjusting holdings

Question 30

3️⃣ What are the primary uses of security market indexes? Indexes serve as:

Answer 30

A reflection of market sentiment (investor confidence). A benchmark for active managers to assess performance. A measure of market return and risk for asset allocation. A tool for calculating beta and risk-adjusted returns (CAPM). A model portfolio for passive index funds (ETFs, mutual funds).

Question 31

What are the main types of equity indexes?

Answer 31

Broad market index: Represents most of a market (e.g., Wilshire 5000). Multi-market index: Covers multiple countries (e.g., MSCI World Index). Multi-market index with fundamental weighting: Adjusts country weightings based on economic factors (e.g., GDP). Sector index: Tracks industries (e.g., healthcare, financials). Style index: Tracks investment styles (e.g., small-cap value).

Question 32

What are key differences between major security market indexes? Indexes differ in:

Answer 32

Weighting methods (price-weighted, market-cap, equal-weighted). Number of constituents (Dow 30 vs. Wilshire 5000). Geographic focus (U.S. vs. global). Asset type (stocks, bonds, commodities, real estate). Example: Dow Jones Industrial Average: 30 large U.S. stocks, price-weighted. MSCI All Country World Index: Stocks from 47 countries, market-cap weighted.

Question 33

What are key considerations for fixed-income and alternative indexes?

Answer 33

Fixed-income indexes: Large security universe, high turnover. Illiquid markets, pricing challenges. Examples: Barclays Global Aggregate Bond Index. Alternative indexes: Commodities: Based on futures, not spot prices (e.g., S&P GSCI). Real estate: Tracks REITs or property sales (e.g., FTSE EPRA/NAREIT). Hedge funds: Self-reported, potential return bias (e.g., HFRX Global Hedge Fund Index).

Question 34

Q: What is an informationally efficient capital market?

Answer 34

A: A market where security prices fully, quickly, and rationally reflect all available information, making it difficult to consistently achieve abnormal returns.

Question 35

Q: What are the three forms of market efficiency?

Answer 35

A: 1. Weak-form: Prices reflect past market data; technical analysis is ineffective. 2. Semi-strong form: Prices reflect all publicly available information; fundamental analysis is ineffective. 3. Strong-form: Prices reflect all public and private (inside) information; no one can consistently earn excess returns.

Question 36

Q: What are key factors that influence market efficiency?

Answer 36

A: 1. Number of market participants (more investors improve efficiency). 2. Availability and fairness of information (greater transparency improves efficiency). 3. Impediments to trading (arbitrage helps correct mispricings). 4. Transaction and information costs (high costs reduce efficiency).

Question 37

Q: What are examples of market anomalies?

Answer 37

A: - Calendar anomalies (January effect, weekend effect). Overreaction & momentum effects (extreme past returns predicting reversals or continuations). Size effect (small-cap stocks outperform large-cap stocks). Value effect (low P/E or high dividend yield stocks outperform growth stocks). Earnings announcement drift (stock prices continue reacting after earnings surprises).

Question 38

Q: How does market efficiency impact investment strategies?

Answer 38

A: - In efficient markets, passive investing (index funds) is preferred. In inefficient markets, active investing (stock picking, market timing) may generate excess returns. Even in efficient markets, portfolio managers add value through risk management, asset allocation, and tax efficiency.

Question 39

Q: What are key investor biases that behavioral finance studies?

Answer 39

A: - Loss aversion (disliking losses more than liking equivalent gains). Overconfidence (excessive belief in one's investment skill). Herd behavior (following others instead of independent analysis). Mental accounting (treating money differently based on its source or intended use).

Question 40

Question: What are common shares, and what rights do common shareholders have?

Answer 40

Answer: Common shares represent ownership in a company and come with voting rights. Shareholders have a residual claim on assets after debtholders and preferred stockholders in case of liquidation. They can vote for the board of directors, on mergers, and on auditor selection. Dividends are not guaranteed and are determined by the firm.

Question 41

Question: What is the difference between statutory and cumulative voting?

Answer 41

Answer: In statutory voting, each share equals one vote per board seat. In cumulative voting, shareholders can allocate their total votes across multiple candidates, allowing minority shareholders to have more influence.

Question 42

Question: What are the characteristics of preferred shares?

Answer 42

Answer: Preferred shares combine features of debt and equity. They typically pay fixed dividends, have no maturity date, and generally lack voting rights. They may be callable (redeemable by the firm) or putable (sellable back to the issuer).

Question 43

Question: What is the difference between cumulative and non-cumulative preference shares?

Answer 43

Answer: Cumulative preference shares accumulate unpaid dividends that must be paid before common shareholders receive dividends. Non-cumulative preference shares do not accumulate unpaid dividends, but they still take priority over common shareholders in dividend payments.

Question 44

Question: How do public and private equity securities differ?

Answer 44

Answer: Public equity is traded in open markets with high liquidity and regulatory disclosures. Private equity has less liquidity, fewer disclosure requirements, lower reporting costs, and allows firms to focus on long-term goals.

Question 45

Question: What are the three main types of private equity investments?

Answer 45

Answer: The three main types are: Venture Capital – Funding for early-stage firms. Leveraged Buyouts (LBOs) – Buying firms using debt, often by existing management (MBOs). Private Investment in Public Equity (PIPEs) – Public firms selling equity privately at a discount for quick capital.

Question 46

Q: What is direct investing in foreign equity securities?

Answer 46

A: Direct investing involves purchasing foreign company shares in foreign markets. Challenges include foreign currency risk, illiquidity, varying reporting standards, and the need to understand foreign regulations.

Question 47

Q: What are depository receipts (DRs)?

Answer 47

A: DRs represent ownership in a foreign firm and trade in other countries' markets in local currencies. They are issued by a bank holding the foreign company's shares and simplify foreign investment.

Question 48

Q: What is the difference between sponsored and unsponsored DRs?

Answer 48

A: Sponsored DRs provide voting rights and require greater disclosure, while unsponsored DRs do not grant voting rights to investors, as the depository bank retains them.

Question 49

Q: What are Global Depository Receipts (GDRs)?

Answer 49

A: GDRs are issued outside the U.S. and the issuer’s home country, often traded in London and Luxembourg. They are usually denominated in U.S. dollars and allow investment without capital flow restrictions.

Question 50

Q: What are American Depository Receipts (ADRs)?

Answer 50

A: ADRs are U.S.-dollar-denominated securities representing foreign shares that trade in the U.S. They can be Level I, II, III, or Rule 144A, depending on listing and capital-raising ability.

Question 51

Q: What are Global Registered Shares (GRS) and Baskets of Listed Depository Receipts (BLDRs)?

Answer 51

A: GRS are traded in multiple currencies across global exchanges, while BLDRs are ETFs consisting of multiple DRs, trading like stocks in the market.

Question 52

Q: What is the purpose of a company research report?

Answer 52

A: A company research report provides an analyst’s valuation and investment recommendations based on projected earnings, cash flows, and financial position.

Question 53

Q: What are the key components of an initial company research report?

Answer 53

A: Front matter, recommendation rationales, company description, industry overview, financial analysis, valuation, ESG factors, and key risks.

Question 54

Q: What differentiates an initial research report from a subsequent one?

Answer 54

A: Initial reports are more thorough, while subsequent reports provide updates, variance analyses, changes in valuation, and risk assessments.

Question 55

Q: What factors define a company’s business model? .

Answer 55

A: Products/services, customers, sales channels, pricing/payment terms, and supplier relationships

Question 56

Q: What are the four types of information sources analysts use to determine a company's business model?

Answer 56

A: 1) Company disclosures, 2) Public third-party sources, 3) Proprietary third-party sources, and 4) Proprietary primary research.

Question 57

Q: Why is understanding a company's business model important for analysts?

Answer 57

A: It helps analysts determine key income and balance sheet drivers, competitive positioning, and investment potential. Would you like me to adjust or simplify any of these?

Question 58

Q: What are the two primary approaches analysts use to analyze revenue drivers?

Answer 58

A: Analysts use a bottom-up approach, breaking revenue into specific drivers like price, volume, segments, or geography, and a top-down approach, which considers macroeconomic factors like market share or GDP growth.

Question 59

Q: What determines a company's ability to set prices without losing sales?

Answer 59

A: Pricing power depends on industry market structure and competitive positioning. Highly competitive markets limit pricing power, while less competitive markets (monopolies, oligopolies) allow companies to set higher prices.

Question 60

Q: How does operating leverage impact a company's profitability?

Answer 60

A: Operating leverage occurs when a company has high fixed costs. It amplifies profits when sales increase but also magnifies losses when sales decline. It is measured by degree of operating leverage (DOL): DOL = %Δ Operating Profit / %Δ Sales

Question 61

Q: What are key profitability metrics used to evaluate operating performance?

Answer 61

A: - Gross Profit = Revenue – Cost of Sales EBITDA = Gross Profit – Operating Expenses EBIT (Operating Profit) = EBITDA – Depreciation & Amortization Each metric can be divided by revenue to calculate gross margin, EBITDA margin, and EBIT margin.

Question 62

Q: What does a company's working capital indicate?

Answer 62

A: Working capital (Current Assets – Current Liabilities) measures liquidity and short-term financial health. A positive working capital suggests the company can finance operations internally, while a negative one indicates reliance on external financing.

Question 63

Q: How do analysts evaluate a company's capital structure?

Answer 63

A: Analysts assess a company's use of debt and equity through leverage ratios, coverage ratios, and the degree of financial leverage (DFL): DFL = %Δ Net Income / %Δ Operating Income Higher DFL indicates greater sensitivity of net income to changes in operating income.

Question 64

Q: What is the purpose of industry and competitive analysis?

Answer 64

A: It helps analyze industry size, profits, market share, and a company's position within its industry to assess future profitability and competitive standing.

Question 65

Q: What factors contribute to differences in profitability within an industry?

Answer 65

A: Business model, company size, and competitive strategy, while industry-wide factors set a profitability limit.

Question 66

Q: What are the five steps of industry and competitive analysis?

Answer 66

A: Define the industry. Survey industry size, growth, profitability, and market share trends. Analyze industry structure using frameworks like Porter's Five Forces. Examine external influences (PESTLE). Assess companies’ competitive strategies.

Question 67

Q: What are the major industry classification systems?

Answer 67

A: GICS: Sector → Industry Groups → Industries → Subindustries ICB: Industries → Supersectors → Sectors → Subsectors TRBC: Economic Sectors → Business Sectors → Industry Groups → Industries → Activities

Question 68

Q: What are common ways to classify companies?

Answer 68

A: By: Product/service Business cycle sensitivity (cyclical vs. defensive) Financial measures (market cap, profitability ratios) Geography ESG factors

Question 69

Q: How is industry concentration measured, and what does it indicate?

Answer 69

A: The Herfindahl-Hirschman Index (HHI) sums the squares of firms' market shares. HHI < 1,500: Low concentration, high competition, lower pricing power. HHI 1,500-2,500: Moderate concentration. HHI > 2,500: High concentration, lower competition, greater pricing power.

Question 70

Q: What are the five forces in Porter’s industry analysis framework?

Answer 70

A: Rivalry among competitors, threat of new entrants, threat of substitutes, bargaining power of buyers, and bargaining power of suppliers.

Question 71

Q: What factors increase rivalry among existing competitors?

Answer 71

A: High number of competitors, slow industry growth, high fixed costs, undifferentiated products, and costly exit barriers.

Question 72

Q: What factors create high barriers to entry in an industry?

Answer 72

A: Large capital requirements, economies of scale, strong brand identity, government regulations, and high switching costs for consumers.

Question 73

Q: How do substitute products affect industry profitability?

Answer 73

A: Substitutes increase price elasticity of demand, limiting the price firms can charge and reducing overall profitability.

Question 74

Q: When do buyers and suppliers have high bargaining power?

Answer 74

A: Buyers have power when they can easily switch suppliers or demand lower prices. Suppliers have power when they are few in number or provide scarce, essential inputs.

Question 75

Q: What are the six factors in the PESTLE framework?

Answer 75

A: Political, Economic, Social, Technological, Legal, and Environmental influences on industry dynamics.

Question 76

Q: What are the four key forecast objects in financial forecasting?

Answer 76

A: 1. Financial statement lines with clear drivers 2. Financial statement items without clear drivers 3. Summary measures 4. Ad hoc items

Question 77

Q: Why is it important to avoid overly complex financial forecasting models?

Answer 77

A: Complex models require significant effort to create and maintain, and they are not necessarily more accurate than simpler models.

Question 78

Q: What are the four forecasting approaches used in financial analysis?

Answer 78

A: 1. Base forecasts on historical results 2. Assume results will converge to a historical base rate 3. Use management guidance 4. Use discretionary forecasting methods

Question 79

Q: When is it appropriate to use historical results as a forecasting approach?

Answer 79

A: When forecasting noncyclical or mature-stage companies, or when analyzing objects considered immaterial.

Question 80

Q: What is a key limitation of using management guidance for financial forecasting?

Answer 80

A: Management guidance often includes assumptions that may be biased, and it may not be reliable for cyclical companies.

Question 81

Q: What factors determine the appropriate forecast horizon?

Answer 81

A: Investor time horizon, industry cyclicality, and company-specific factors such as operational changes.

Question 82

Which approach is most appropriate for an analyst to use to forecast revenues for a company in a highly cyclical industry? A) Historical results. Incorrect Answer B) Analyst’s discretionary forecast. C) Historical base rates and convergence.

Answer 82

Explanation An analyst's discretionary forecast is most frequently used for companies in cyclical industries as well as companies that have few or no peers, those that do not provide management guidance, and those in the midst of a significant business transition. The historical results approach is not appropriate for companies in cyclical industries because a future period is probably going to be at a dissimilar point in the business cycle compared to the current or past period, so the results would not be comparable. The historical base rates and convergence approach is not appropriate for companies in highly cyclical industries because the smooth convergence to a long-term base rate would hide the annual volatility. (Module 45.1, LOS 45.a)

Question 83

Q: What is intrinsic value, and how do analysts use it in valuation?

Answer 83

A: Intrinsic value is the rational value investors would place on an asset if they had full knowledge of its characteristics. Analysts use valuation models to estimate intrinsic values and compare them to market prices to determine if stocks are overvalued, undervalued, or fairly valued.

Question 84

Q: What are the three major categories of equity valuation models?

Answer 84

A: 1. Discounted Cash Flow Models – Estimate stock value as the present value of future cash flows (e.g., Dividend Discount Model, Free Cash Flow to Equity Model). 2. Multiplier Models – Use ratios like P/E or EV/EBITDA to estimate intrinsic value. 3. Asset-Based Models – Estimate value as total asset value minus liabilities and preferred stock.

Question 85

Flashcard 3: Types of Dividends and Stock Splits Q: What are the differences between cash dividends, stock dividends, stock splits, and reverse stock splits?

Answer 85

A: - Cash dividends: Paid in cash to shareholders, either regular or special. Stock dividends: Paid in additional shares rather than cash, increasing share count but not shareholder wealth. Stock splits: Increase the number of shares, reducing price per share (e.g., 3-for-1 split). Reverse stock splits: Reduce the number of shares, increasing price per share

Question 86

Q: Why might a company repurchase its own shares?

Answer 86

A: Companies repurchase shares to: Distribute cash to shareholders as an alternative to dividends. Support or signal undervaluation of stock. Offset dilution from employee stock options. Provide tax advantages in some jurisdictions.

Question 87

Q: What are the key dates in the dividend payment process?

Answer 87

A: 1. Declaration date – Board announces dividend. 2. Ex-dividend date – First day a buyer won’t receive the dividend. 3. Holder-of-record date – Shareholders as of this date receive the dividend. 4. Payment date – Dividend is distributed to shareholders.

Question 88

Q: What is the rationale behind using present value models to value equity?

Answer 88

A: Present value models assume that the intrinsic value of a stock is the present value of its expected future cash flows, typically dividends or free cash flow to equity (FCFE).

Question 89

Q: What is Free Cash Flow to Equity (FCFE), and why is it used instead of dividends?

Answer 89

A: FCFE represents the cash available to equity holders after debt obligations and capital expenditures. It is used when firms do not pay dividends but generate cash flow available to shareholders.

Question 90

Q: What is the rationale for using price multiples in equity valuation?

Answer 90

A: Price multiples are widely used because they are easy to calculate, readily available, and allow for time series and cross-sectional comparisons. They provide a relative valuation by comparing a stock’s price multiple to a benchmark.

Question 91

Q: How does the price-to-earnings (P/E) ratio relate to fundamentals?

Answer 91

A: The justified P/E ratio is derived from the Gordon growth model and is influenced by the dividend payout ratio, required rate of return, and expected growth rate. Higher payout and growth rates increase P/E, while a higher required return decreases it.

Question 92

Q: What is enterprise value (EV), and how is it used in valuation?

Answer 92

A: EV represents the total value of a firm, calculated as: EV = Market value of equity + Market value of debt – Cash & short-term investments It is commonly compared to EBITDA (EV/EBITDA) to assess firm valuation, especially when capital structures differ.

Question 93

Q: What is an asset-based valuation model?

Answer 93

A: It estimates a firm's equity value as the market value of assets minus the market value of liabilities. This method is useful for firms with tangible assets but may underestimate value for firms with significant intangible assets.

Question 94

Q: What are the key differences between price multiples based on comparables vs. fundamentals?

Answer 94

A: - Comparables: Uses market prices of similar firms to determine if a stock is over/undervalued. Fundamentals: Uses valuation models (e.g., DDM) to estimate what a multiple should be based on intrinsic factors.