Equity Securities Flashcards Preview

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Flashcards in Equity Securities Deck (19):
1

Statutory voting

Each share gets one vote in each election

2

Cumulative voting

Shares can be allocated to one or more candidates

3

Cumulative preferred shares

Must make up preferred dividends before common dividend can be issued

4

Participating preferred shares

Extra dividend if profit exceeds certain level

5

Depository Receipts (e.g. ADRs)

Ownership in foreign firm and traded in local markets/local currencies.

6

Book value of equity

Assets - liabilities

7

ROE

(net income - preferred dividends) / average book value of common equity

8

Cyclicals

(1) high operating leverage
(2) Dependent on business cycle
(3) Expensive products, non necessities

9

Defensives

(1) Least affected by business cycles

10

Growth

Demand so large, not affected by business cycle

11

Industry life cycle (5)

(1) Embryonic
(2) Growth
(3) Shakeout
(4) Mature
(5) Decline

12

Dividend discount model formula

Sum[(dividend / (1+required return)^t]

i.e. discounted cash flows

13

Free cash flow to equity (FCFE)

cash flow from operations - fixed investments + net borrowing

14

Gordon growth model

Value = dividend / (required return - growth rate)

Assumes constant growth rate

15

Estimating dividend growth

(1) historical growth rates
(2) median industry growth rate
(3) estimate sustainable growth rate

16

Sustainable growth rate

ROE * retention rate

17

Value of stock that is expected to pay dividends in the future

(1) Calculate value at point when dividends are going to start being paid
(2) Discount value back to today

18

Multi-stage divined models

(1) Discount individual dividends back
(2) Then calculate gordon from x period on
(3) Discount gordon back and sum
Note: Gordon assumes first dividend is paid today

19

Payout ratio

Dividend / earnings