Fundamental Equity Analysis Flashcards
True or False
Technical Analysis is as valid for debt securities (bonds) as it is for equity securities (stocks.
True
Fundamental Analysis approach to analyzing stocks
MOST COMMON METHOD
Focuses on factors that can affect company’s performance (not necessarily company’s performance itself)
“Company Analysis” of analyzing stocks
Focusing on strength of individual company, not outside factors (industry, economy, etc.)
Focus: Past performance, future growth possibilities, etc.
Explain Intrinsic Value (of a security)
The present value of the future stream of cash flows an investor expects to receive from owning the security
What is the purpose of the Dividend Discount Model?
Meant to find intrinsic value of common stocks
What is the formula for the Dividend Discount Model?
V = D₀ ÷ (r - g)
V = Intrinsic Value
D₀ = Last year’s dividend
r = required rate of return
g = constant growth rate in perpetuity
(Meant to find intrinsic value of common stocks)
What is the Zero Growth Model?
It is meant to find intrinsic value & uses dividend discount model formula
Assumes dividends will remain CONSTANT throughout future of stock
Describe the Constant Growth Model
(formula AND purpose)
Intrinsic value formula that assumes dividends will grow in line with company earnings:
V = D₀ (1+g) ÷ (r - g)
OR
V = D₁ ÷ (r - g)
V = Intrinsic Value
D₀ = Last year’s dividend
D₁ = next yr’s dividend
r = required rate of return
g = constant growth rate in perpetuity
How do you find the expected rate of return using Constant Growth Model? (formula)
r = D₁ ÷ (P + g)
r = expected rate of return
D₁ = next yr’s dividend
P = current price
g = dividend growth rate
Preferred Stock Valuation (what is it and what is it’s formula?)
uses the basic dividend discount growth formula because preferred stock dividends are paid on a consistent basis
V= D ÷ r
Price to Free Cash Flow Model (formula & purpose)
Intrinsic Value Model
Free cash flow takes place of dividend (usually for small company stocks w/ no dividend)
FCF₀ x (1 + g) ÷ k - g
What is Ratio Analysis?
When investors analyze a stock by looking at the financial statements of a firm
What do “Profitability Ratios” do? (2 things)
- Measure overall effectiveness of the firm’s management
- Assess probable future returns
Profitability Ratio
Return on Assets Ratio (formula & its purpose)
ROA
ROA = Net income ÷ Total Assets
[how much each $ of assets is contributing to net income]
Profitability Ratio
Profitability Ratio
Return on Equity Ratio (formula and its purpose)
ROE = Net Income ÷ Owner’s Equity
[will investor receive sufficient return?]
Profitability Ratio
