Topic 4 Equities and market valuations 2 Flashcards
(22 cards)
What is technical analysis in equity markets?
Technical analysis involves using stock price charts and patterns to predict future price movements using terms like ‘resistance levels’ and ‘floor prices.’
What are the challenges to the Efficient Market Hypothesis (EMH)?
Challenges to EMH include anomalies such as the Monday effect, January effect, end-quarter effect, and lunar/solar cycle effects.
How do anomalies challenge the EMH?
Anomalies like the January effect suggest that stock returns are not fully random, but after being published, these anomalies typically shrink and are hard to profit from.
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 the P/E ratio?
The Price-to-Earnings (P/E) ratio is the ratio of a company’s market price per share to its earnings per share, helping to assess if the stock is over or under-valued.
What is the P/B ratio?
The Price-to-Book (P/B) ratio compares a company’s market value to its book value, offering insight into how much investors are paying for each dollar of equity.
What is the dividend yield?
The dividend yield is the percentage of a company’s share price paid out as dividends to shareholders, indicating the income return of the stock.
What is comparables analysis?
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 values a company by forecasting its future dividends or cash flows and discounting them to the present value using a discount rate.
What is the role of the cost of equity in DCF valuation?
The cost of equity is the required return used as the discount rate in DCF calculations, representing the risk associated with the investment.
What are the three key financial statements used in valuation?
The three 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, expenses, and profits over a specified period, indicating its profitability.
What is the Statement of Cash Flows?
The Statement of Cash Flows shows the sources and uses of cash, split into operating, investing, and financing activities.
What does the 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 growth expectations.
What is the difference between intrinsic value and market price?
Intrinsic value refers to the true worth of a company based on fundamentals, while market price is the price at which the stock is currently trading.
What is the importance of using historical financial data in valuation?
Historical financial data, such as past earnings and cash flows, is used to forecast future performance and provide a benchmark for valuation.
How does growth rate affect stock valuation?
A higher growth rate leads to higher future cash flows, which increases the company’s valuation, as the future cash flows are more valuable.
What is the purpose of using a DCF model for valuation?
The DCF model provides an estimate of a company’s intrinsic value by discounting its projected future cash flows based on specific assumptions.
What is the role of dividend yield in stock valuation?
Dividend yield is an important metric for income-focused investors, providing a measure of the return on investment in terms of dividends.
What are some online sources for accessing financial data for valuation?
Financial data can be accessed through sources like Morningstar and company financial statements, which provide key information for valuation methods.
