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Bus 206 Final

Bus 206 Final: chapter 11

QuestionAnswer
mean PE ratio of the industry * firm's expected earning Price-Earnings Method to value stock
significance of the Price Earnings method? it assumes that the growth in the firm's earnings will be similar to the industry
reasons for different valuations using the PE method? 1. use of different forecasts for earnings of firms or industry 2. disagreement on the proper measure of earnings 3. disagreement on which firms represent the industry's norm.
limitations of PE method the PE ratio varies a lot overtime, making it hard to estimate conversion
the price of a stock should reflect the present value of the stock's future dividends General Dividend Discount Model
What kind of firms should use the Free Cash Flow Model? firms that do not pay dividends
what is the Free Cash Flow Model based on? the present value of future cash fllows
limitation of free cash flow model it is difficult to obtain an accurate estimate of free cash flow per period
one way to make the free cash flow model work? forecasted earnings + a forecast of the firm's non-cash expenses and investments
sometimes used to estimate the required rate of return of stock Capital Asset Pricing Model
The CAPM is based on the premise that... the only important risk of a firm is its systematic risk
risk that results from exposure to general stock market movement systematic risk
risk specific to an individual firm, because investors can avoid that type of risk by holding diversified portfolios unsystematic risk
market return minus the risk free rate market risk premium
how does an increase in economic growth impact a firm? it is expected to increase the demand for products and services which increases a firm's cash flows
one of the most prominent forces driving the stock market is? the risk free rate
does the relationship between interest rates and stock prices vary over time or is it stable? it varies over time
how does the value of the dollar effect U.S. stock prices? U.S. stock may be higher when the dollar is expected to strengthen because foreigners sell them when they are near their peak
represents the general mood of investors in the stock market investor sentiment
portfolio managers invest in riskier small stocks at the beginning of the year and then shift to larger more stable companies at the end of the year. this places an upward pressure on small stocks in january january effect
how are firm's stock prices effected when an acquisition is being made? -the acquired firm's stock will rise - the acquiring firm's stock will depend on the effects of the acquisition
how to measure the risk of a stock? you have to use: price volatility, its beta, and the value at risk
what does a stock's beta measure? the sensitivity of its returns to market returns
a measurement that estimates the largest expected loss to a particular investment position for a specified confidence level value at risk
what does the value at risk focus on? the pessimistic portion of the probability distribution of returns from the investment concern
what does the sharpe index rely on? total variability (standard deviation)
what does the treynor index rely on beta
security prices reflect all market-related info weak form efficiency
security prices fully reflect all public info semi-strong form efficiency
security prices fully reflect all info strong form efficiency
an appropriate assumption for mature companies with history of stable growth constant growth dividend discount model
can be used to determine value or price of stock at any point in time constant growth dividend discount model
limitations of constant growth dividend discount model -growth has to be lower than rate of return
what is the yield on newly issued treasury bonds used for? used as a proxy for the risk free rate
Created by: devenmccormick
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