Shared Flashcard Set

Details

CFA Session 14
Equities
23
Finance
Undergraduate 4
01/29/2010

Additional Finance Flashcards

 


 

Cards

Term
Define a growth company
Definition
A growth company is one that consistently selects projects that earn higher returns than required for their level of risk. 
Term
Define a growth stock
Definition
A growth stock is one that earns above-normal risk-adjusted returns
Term
What is a defensive company?
Definition
A defensive company has earnings that are insensitive to economic recessions. 
Term
Define a defensive stock
Definition
A defensive stock is one that declines less than the market when the overall market is declining (low beta stocks)
Term
Define a cyclical company
Definition
A cyclical company has earnings that are sensitive to the business cycle
Term
What is a cyclical stock?
Definition
A cyclical stock has returns that increase and decrease more than the overall market (high beta stocks)
Term

True/False

A speculative company has assets with high risk and the potential to generate high earnings.

Definition
True
Term
What is a speculative stock?
Definition
A speculative stock has a large probability of low or negative returns and a small probability of very high returns
Term

True/False

A growth stock has low expected earnings growth, a high P/E ratio and a high price-book ratio

Definition

FALSE

A growth stock has HIGH expected earnings growth, a high P/E ratio and a high price-book ratio

Term

 

True/False

A value stock has slower growth, a lower P/E ratio, a lower price-book ratio and a relatively high dividen yield

Definition
True
Term
How does a company estimate earnings per share?
Definition
A company's earngings per share can be estimated based on sales forecast, an estimate of net profit margin and the number of shares outstanding
Term

True/False

Is Expected return < required return for a growth stock?

Definition

FALSE

Required return < expected return for a growth stock

Term

TRUE/FALSE

 

A growth company's sotck can have below-average risk adjusted returns

Definition
True
Term

True/False

A growth company can be over- or undervalued

Definition
TRUE
Term

True/False

 

A growth company has above average investment opportunities

Definition
True
Term
Stock valuation is correct if the expected rate of return is ______ the required rate, buy the stock; it's underpriced
Definition
Stock valuation is correct if the expected rate of return is  > the required rate, buy the stock; it's underpriced
Term

True/False

 

A speculative company has low risk assets

Definition

False

 

A speculative company has HIGHLY risky assets

Term
Stock valuation is correct if the expected rate of return is ______ the required rate, don't buy the stock; it's overpriced
Definition
Stock valuation is correct if the expected rate of return is < the required rate, don't buy the stock; it's overpriced
Term

True/False

 

A speculative stock has a low probability of earning a market rate of return

Definition
True
Term

Example:

Dividends over next yr = $0.60

Long-term growth rate = 135

Intrinsic Value = $24

Shares currently priced at $22

Assume stock moves to intrinsic value over next yr what is expected return on stock?

Definition

24-22+.60/22 = .118

 

= 11.8%

Term

Example:

Estimated EPS = $10 per share

Dividend payout ratio=40%

Required rate of return=12%

Expected long-term growth rate of dividends=5%

Whas is the estimated value of company's stock?

Definition

 (P/E) = (D/E)/(k-g)

 

.40/(.12-.05) = 5.70

 

5.70*10 = $57.00

Term
What are the 4 types of structural changes to an industry?
Definition
  1. Demographics = age and population changes. Income and ethnicity distributions. Trends in the geographical distribution of populations
  2. Lifestyles = increases in meals consumed outside the home. Catalog sales. Trends in consumer "styles"
  3. Technology = can affect both spending habits and how products are distributed, and increase production and margins
  4. Politics and Regulation = Tariffs, terrorist activities, Regulation/de-regulation of products
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