Topic 4 Equities and market valuations Flashcards
(23 cards)
What is technical analysis in equity markets?
Technical analysis involves using stock price charts and patterns to predict future price movements. It uses terms like ‘resistance levels’ and ‘floor prices’.
What are some challenges to efficient markets?
Challenges to efficient markets include anomalies like the Monday effect, end-quarter effect, January effect, and lunar/solar cycle effects.
What does the existence of anomalies suggest for the Efficient Market Hypothesis (EMH)?
Anomalies in stock returns may seem to challenge the EMH, but they shrink after being published and are not usually profitable for traders.
What are the three main approaches to equity valuation?
The three main approaches are financials analysis, comparables analysis, and discounting (dividends/cash flows) approaches.
What is financials analysis in equity valuation?
Financials analysis involves examining key financial information such as income statements, balance sheets, and cash flows, along with key ratios like P/E and P/B ratios.
What is the P/E ratio?
The P/E ratio is the ratio of a company’s market price per share to its earnings per share, used to assess valuation relative to earnings.
What is the P/B ratio?
The P/B ratio is the ratio of a company’s market value to its book value, providing insight into how much investors are willing to pay for each dollar of net assets.
What is the dividend yield?
The dividend yield is the percentage of a company’s share price that is paid out as dividends to shareholders.
What is the importance of comparables analysis in valuation?
Comparables analysis involves comparing a company’s financial ratios with those of similar companies in the same or related sectors.
What is the discounted cash flow (DCF) method?
The DCF method involves discounting future dividends or cash flows to the present value to estimate a company’s intrinsic value.
What are the key financial statements used in valuation?
The key financial statements are the Balance Sheet, the Profit and Loss (Income) Statement, and the Statement of Cash Flows.
What does the Balance Sheet show?
The Balance Sheet shows a firm’s assets and liabilities, and how those assets are financed, either through debt or equity.
What is the Profit and Loss Account?
The Profit and Loss Account (Income Statement) shows a company’s revenues and expenses, indicating its profitability.
What is the Statement of Cash Flows?
The Statement of Cash Flows shows the sources and uses of cash from operating, investing, and financing activities.
What does the Price-to-Earnings (P/E) ratio tell us about a stock?
The P/E ratio helps assess how much investors are willing to pay for each dollar of earnings, with higher ratios indicating higher expectations for future growth.
What is the role of the cost of equity in discounted cash flow (DCF) valuation?
The cost of equity is used as the discount rate in DCF calculations to determine the present value of a company’s future cash flows.
What is the difference between intrinsic value and market price?
Intrinsic value refers to the true, inherent worth of a company, based on its fundamentals, while market price is the price at which the stock is currently trading.
What is the purpose of using comparables analysis?
The purpose of comparables analysis is to compare a company’s financial ratios to similar companies to determine if the stock is under or overvalued.
What is the importance of dividend yield in stock valuation?
Dividend yield is important because it provides an indication of how much income an investor can expect relative to the stock price, especially for income-focused investors.
What is the significance of using historical data in valuation?
Historical data, such as past earnings and cash flows, can help predict future performance and provide a benchmark for valuation.
How does growth rate affect valuation techniques?
A higher growth rate in earnings or cash flows generally leads to a higher valuation, as future cash flows are worth more when they grow rapidly.
What is the main advantage of using a DCF model for valuation?
The DCF model provides a detailed intrinsic value by considering the time value of money and forecasting future cash flows based on specific assumptions.
