FIN310 Midterm

A firm's stock price increases from $25 to $26 and pays a dividend of $1 per share over a 1-year period. What is the 1-year Total Return of this stock?

$ Return: 1 + (26-25) = 2 % Return: 2/25= .08= 8%

Geometric Average

(1+R1*1+R2*1+R3)^1/n - 1

What is true about the correlation of GDP vs Stocks/Bonds?

GDP is postively correlated to both Stock Returns and Bond Yields

DuPont Identity formula

ROE= Profit Margin * Total Asset Turnover*Equity Multiplier

Cargo ship represents

The ship represents the economy and the speed at which changes in GDP occur. The economy can change direction, but it can be slow and deliberate. The wide turns the ship makes are a visual representation for how the economy changes. It is visibile to all (via leading indicators and trends) and has a moderate lead time until when it changes direction. Also, the changes are generally not surprising once they occur because they are well telegraphed ahead of time.

If the market bid/ask of UBER Stock is $90 / $91 what is true?

a market sell order would trade at $90

yield Curve: spread between 10y and 2 or 10 yr and Fed Funds (key leading indicator)

a steep curve is more expected, a flat or inverted curve could indicate poor risk pricing in the markets and could lead to recessionary activity and lower GDP

Dollar Return

dividend income + capital gain/loss

turnover ratio

how often assets are turned into sales - fixed asset turnover - inventory turnover -account rec turnover - total asset turnover

Term for stock value based on underlying cash flows

intrinsic value

What is NOT a requirement when you SHORT SELL shares of stock? post margin collateral borrow shares from a broker/dealer purchase shares from the market to close position nothing, all are required

nothing, all are required

treasury yield

return on investment

If the currency of your country is depreciating, this should __________ exports and __________ imports.

stimulate; discourage Explanation: If your country's currency becomes weaker, this means goods in your country appear cheaper than they were before. As such, this will increase demand for goods in your country all else equal - and therefore you should stimulate the exports (encourage exports) and discourage imports (which are more expensive due to the currency change).

Efficient Market Hypothesis

suggests that all investors are on the same playing field and that any future abnormal returns will be due to unknown factors, rather than skill or informational advantage

Whenever OPEC (association that controls global oil supply) attempts to influence the price of oil by significantly altering production or supply of oil, economists refer to this type of event as a ______________.

supply shock

exchange rate

the rate at which domestic currency can be converted into foreign currency (CCY) - One Unit of X CCY / One Unit of Y CCY - Ex.-- EUR/USD = 1.15263 means 1 Euro buys $1.15263 US dollars

depth

the total number of shares offered for trading at the best bid and ask prices

Efficient Market Hypothesis

theory that suggests current asset prices reflect all currently available information and speculators are unable to profit from having superior information relative to others in the market

What's TRUE of Large Company Stocks over long periods of time?

they underperform small company stocks

manufacturers new orders (key leading indicator)

this indicates a slowing/growing of manufacturing demand.

A firm has 90% of its assets in property, plant and equipment (fixed assets) and finances its business primarily with debt (80% debt to invested capital). Additionally, DOL or degree of operating leverage is higher than firms in the S&P 500. Given the scenarios presented to you below, what is likely true about this firm's earnings, returns, profits (choose the answer where both items are true).

High volatility of earnings and higher stock returns during a recovery relative to firms in the S&P 500 Explanation: This firm has high operating leverage and high financial leverage. Both of these contribute to higher fluctuations/sensitivity in their earnings and their stock returns. Firms with higher leverage have more sensitivity to sales and therefore when sales are higher, the firms are more profitable (higher margins) and when sales slow, they are less profitable (lower margins). This sensitivity translates into more volatility in their stock price / stock returns relative to firms with lower levereage assuming everything else about the firms are equal. General Rule: more leverage, more volatility | more leverage, more sensitivity to sales and economic cycles

Which metric is used for measuring intrinsic value?

PV of Future Dividends

Hudson Corporation will pay a dividend of $5.00 per share next year. The company pledges to increase its dividend by 4.60 percent per year indefinitely. If you require a return of 6.80 percent on your investment, how much will you pay for the company's stock today?

Value of stock= D1/(R-g); 5/(.068-.046)= $227.27

new orders for non-defense capital goods (key leading indicator)

capital goods are larger, more strategic purchases. economic activity would expect to slow if this metric declines

Sarbans-Oxley Act

centered largely on three broad practices: allocations of shares in initial public offerings, tainted securities research and recommendations put out to the public and misleading financial statements and accounting practices

Direct financial intermediaries

commercial banks, investment banks

financial assets

define the allocation of income or wealth among investors

profitability ratio

earnings vs. various metrics - net profit margin -EBIT margin - ROE - ROA

dark pools

electronic trading networks where participants can anonymously buy or sell large blocks of securities; not only are they anonymous, even trades may not be reported but if they are- may be lumped with other trades to obscure information about particular participants

broker

executes a trade by contacting a dealer listing an attractive quote

GDP and treasury yields are

highly correlated

Efficient markets

if the whole investor base understands the cycle has changed, then this represents new information which will quickly effect stock prices and take away any material advantage

Currency exchange rates

impact relative costs of goods across countries - this influences relative prices and demand for goods in each country -exchange rates are highly correlated with the differential in interest rates between the countries (interest rate parity)

coincident indicators

indicator metrics which coincide with a growth or recessionary period. The metrics/statistics react at virtually the same time as GDP activity

Financial intermediaries

institutions that "connect" borrowers and lenders by accepting funds from lenders and loaning funds to borrowers; issue their own securities to raise funds to purchase the securities of other corporations

Limit Buy

instructs the broker to buy some number of shares if and when they may be obtained at or below a stipulated price

Limit Sell

instructs the broker to sell if and when the stock price rises above a specified limit

Monetary Policy

refers to the manipulation of the money supply to affect the macroeconomy; other main leg of demand-side policy - works largely through its impact on interest rates - increases in the money supply lower short-term interest rates, encouraging investment and consumption demand (over long term- higher price level though)

Consider the following limit order book for a share of stock. The last trade in the stock occurred at a price of $50. Limit Buy Orders Price;Shares $49.75;500 49.50;800 49.25;500 49.00;200 48.50;600 Limit Sell Orders Price;Shares $50.25;100 51.50;100 54.75;300 58.25;100 a. If a market buy order for 100 shares comes in, at what price will it be filled? b. At what price would the next market buy order be filled? c. If you were a security dealer, would you want to increase or decrease your inventory of this stock?

$50.25; $51.50; increase-- There is considerable buying demand at prices just below $50, indicating that downside risk is limited.

Here is some price information on Fincorp stock. Suppose first that Fincorp trades in a dealer market. Bid: 55.25 Asked: 55.50 a. Suppose you have submitted an order to your broker to buy at market. At what price will your trade be executed? b. Suppose you have submitted an order to sell at market. At what price will your trade be executed? c. What will happen suppose you have submitted a limit order to sell at $55.62. d. What will happen suppose you have submitted a limit order to buy at $55.37.

$55.50; $55.25; trade will not be executed until a bid reaches $55.62; trade will not be executed until an asked price drops to $55.37

Percent Return

$Return/starting value

Currently in the economy, we are seeing many leading economic indicators that are declining while some are increasing. Some Metrics: Manufacturing New Orders had a recent sharp decline The 10y and 2y Treasuries yield curve slope is about 0.55% and was negative about a year ago New home Permits have been slowly increasing, have had a short dip during the pandemic Unemployment Applications ("claims") spiked, have declined but are still at historically high levels Historical GDP growth has fallen to -31% in the past quarter due to the pandemic Question: In a short essay, (1) please describe why leading indicators are important in analyzing the economy's direction; (2) what is a downside of using economic indicator data for only one or a few periods without more context, and (3) what part of the economic cycle (specifically from the notes) DO YOU FEEL are we in at the moment (and why)?

(1) Leading indicators give you a view as to the various components of the economy and how they are trending. Because GDP changes slowly, the leading indicators provide good actual data regarding how various segments of the economy are performing. (2) It is important to understand that data can be volatile and may have evidence of short-term anomolies (storm damage for example would impact consumption for a short period, a large firm goes bankrupt and fires large quantities of people). Therefore, you really need to understand that looking at longer trends of data in addition to having context around what is driving the direction is important to understanding if the data is indicating a long-term trend or is simply a short-term abboration. (3) Given this information it is likely that GDP will rebound from these pandemic levels, but still be very low if not negative: lower manufacturing numbers, the pandemic affected home sales significantly despite the low mortgage rates. The Yield curve is relatively flat, not inverted. Unemployment is still a dire situation and likely will improve, but my view is that it will not rebound to prior levels in the near term. So, given this it is likely we are just beyond a peak and into a contraction phase

You sold short 300 shares of common stock at $30 per share. The initial margin is 50%. You must put up

(30*300)=9000*50%=$4500

Annualized Return

(ending/beginning)^1/n - 1

operating leverage

- Lower fixed costs: less sensitivity to sales; lower operating leverage - higher fixed costs: higher sensitivity to sales: higher operating leverage (more overhead)

leading indicators

- average weekly hours of production workers - initial claims for unemployment insurance - manufacturers' new orders (consumer goods and material industries) -new orders for non defense capital goods -new private housing units authorized by local building permits - yield curve: spread between 10-year T-bond yield and federal funds rate - stock prices, 500 consumer stocks -leading credit index -index of consumer expectations for business conditions

coincident indicators

- employees on nonagricultural payrolls - personal incomes less transfer payments - industrial production - manufacturing and trade sales

high operating leverage

- higher means more cyclical, more sensitive to business cycles-- stronger returns in recoveries, weaker returns in contractions -automakers have high fixed costs and high operating leverage - once the economy sales decline, the firm is more strained as it has very high overhead to maintain with less sales/profits

P/E Ratio Shortfalls

- one year or earnings- main challenge is that you are evaluating the price relative to one year of current or forward looking earnings -EPS includes all expenses- including one time expenses and can skew P/E rather than providing good, longer-term predictor - Doesn't highlight leverage - Another metric: CAPE P/E- use a cyclically.inflation adjusted history of earnings- proved to be a better gauge

lagging indicators

-average duration of unemployment - ratio of trade inventories to sales - change in index of labor cost per unit of output - average prime rate charged by banks - commercial and industrial loans outstanding -ratio of consumer installment credit outstanding to personal income -change oin consumer price index for services

Gross Domestic Product

-dollar value of goods and services produced for the country in a given year (real GDP) -key economic statistic

More than ______ of all trading is believed to be initiated by computer algorithms.

50%

Which of the following is (are) true about dark pools? I. They allow anonymity in trading. II. They often involve large blocks of stocks. III. Trades made through them might not be reported.

All of the above

__________ are examples of financial intermediaries. Commercial banks Insurance companies Investment companies All of the options

All of the options

Why does currency matter?

An investor needs to understand the purchasing power of the dollar globally and consider possible changes through time in their analysis. This will impact cost of goods and economic activity

financial Conditions (key leading indicator)

As financial conditions get better/ get worse so does the economy. there is a positive correlation between financial conditions and GDP

What is the model called that determines the market value of a stock based on its next annual dividend, the dividend growth rate, and the applicable discount rate?

Constant-growth model

What are the four primary components of GDP?

Consumer Spending, Government Spending, Business Investment and Net Imports/Exports

Which of the below would perform WORST in an Economic Contraction (all else equal)?

Cyclical Stocks

Which is an asset allocation decision?

Deciding the percent to invest in equities or bonds

A Pitfall of the Dividend Discount Model is?

Dividends rarely grow at a constant rate

(True/False) Financial Assets provide income for investors and for the overall economy

False

(True/False) Long-Term Bond Returns are generally more volatile than equity returns

False

In a short few sentences, please describe some of the important benefits the financial markets have to the economy, businesses and investors in addition to the linkage to real assets. Who are the intermediaries in the financial markets and how do they facilitate this connection.

Financial markets allow firms to raise capital for new investment projects. They do so by borrowing money or selling shares in the firm. Real assets are what generate net income for our economy while financial assets define the allocation of income or wealth in an economy. Firms use the money from investors to pay for real assets, such as plant, equipment, technology or inventory, all important aspects of a business. While investors are allowing firms to gain capital, they in turn are (hopefully) gaining income for themselves to spend on their own lives. Financial intermediaries have evolved to bring together the suppliers of capital with the demanders of capital. They include banks, investment companies, insurance companies and credit card unions.

Using the grid below, which answer best describes the decision making process in terms of security selection. P/E Ratio; Expected Growth; PEG Ratio Hydrosolutions: 40; 35%; 1.14 Aramatic Scents: 20; 15%; 1.33 Jester Holdings: 21; 16%; 1.31

Hydrosolutions has a higher PE because the firm's growth prospects are stronger than the other firms and PE only considers one-year worth of earnings.

______________ in interest rates are associated with stock market declines. Increases Decreases Higher Slopes

Increases; As interest rates move higher, this increases everyone's cost of borrowing money. Interestingly, it also increases "the discount rate" in the market - so the present value of any project, business or investment will be lower. Since stocks are theoretically a present value of their dividends (and/or ) their business cash flows, this means the price should be lower with higher interest rates. Also, higher rates are a negative to financial conditions (it's harder/more expensive to borrow money and expand your business or buy cars) - this will likely result in a decline in demand for goods and reduction of business growth.

Which sector rotation would likely occur given the scenario presented below? For the last few years the economy has been in a recession. Beginning 6-months ago, GDP is starting to grow and most economic indicators suggest that we are out of the recession and into a recovery phase.

Investors would likely rotate out of healthcare, consumer staples and healthcare stocks and rotate into auto, entertainment and fine jewelery stocks Explanation: If the economy is in a recovery, it is more likely that cyclical stocks will outperform defensive stocks. Cyclical stocks are more volatile and sensitive to cycles - these include industries that rely on discretionary purchases by consumers and businesses (jewelery, autos, aerospace, entertainment, etc...). Defensive stocks such as healthcare, consumer staples (think soap, shaving cream, etc...) and utilities while would grow postivitely, would likely underperform cyclical stocks.

Which of the following statements are true if the efficient market hypothesis holds?

It implies that prices reflect all available information.

Choose 3 leading indicators and one coincident indicator from your notes, look them up on FRED and provide a one line summary of (1) what each one measures and (2) how this measure impacts GDP (i.e. does a higher number on this metric indicate stronger future GDP or weaker GDP in the future).

Leading Indicator: Manufacturers' New Orders: Durable Goods After February 2020, there was a significant drop in manufacturing orders. However, as of July, the orders spiked back up, almost to where they originally were in February, only being roughly 15 thousand (x 1 million) dollars short. This is a significant jump back up, as in April 2020, the orders were almost 100 thousand (x 1 million) dollars less than they were in February, right before the pandemic really picked up. The less manufacturing orders there are, the less money will be circulating in our GDP, as people are not spending as much, so the GDP will decrease. Coincident indicator: All Employees, Total Nonfarm The total number of nonfarm employees in the US was on the rise until a significant drop began in March 2020. From February to April, roughly 22,000 (x 1 thousand) less people were in the workforce. The amount of employees working has gone up since April, but not nearly as high as it was before the pandemic in February. As less employees are working, unemployment claims will rise which creates a domino effect of negative impacts on our economy.

Open Market Bond SALES by the Federal Reserve represent what type of policy?

MONETARY AND TIGHTENING

Looking at the Dupont analysis below, Mugshotz appears to have a stronger business operation, but yet falls behind the others in terms of ROE.What stands out to you as to why MugShotz is underperforming on ROE relative to this peer group? ROE; PM; TAT; EM Mugshotz, Co: 8.66%; 19.25%; 0.9; 0.5 Nuts and Bolts, Inc.: 9.66%; 11.50%; 0.4; 2.1 Yellow Tree Corp: 11.49%; 4.69%; 0.7; 3.5

Mugshotz has issued more equity as a percentage of total assets compared to the others Explanation: For Mugshotz, the two business operations metrics of profitability (Profit Margin) and Turnover (Total Asset Turnover) are stronger than their competitors, yet their leverage as seen by the Equity Multiplier, is very low. This means that the percentage of debt is low relative to the other firms - hence they have issued more equity relative to debt compared to the other firms. All other ratios indicate that Mugshotz has a higher profit margin and therefore has a good ratio between sales and their costs in addition to producing a higher amount of sales from their assets as seen via the Total Asset Turnover.

Suppose that in a wave of pessimism, housing prices fall by 10% across the entire economy. Has the stock of real assets of the economy changed? Are individuals less wealthy

No; Yes

CFFA/FCF=

OCF- change NWC - NCS

4 main parts of GDP

Person Consumption expenditures /consumer spending(70% of GDP) - broken into smaller categories (retail, durable goods, etc...) -almost 50% of this in cervices Business Investment (18% of GDP) - net purchases of real assets- assets that produce economic goods/services Government Spending (17% of GDP) - ex. military spending, public services Net Exports of Goods and Services (5% of GDP) - net imports and exports, US is a net importer, creating a deficit

Sharpe Formula

Return (risk premium) /Risk or: (Rm - Rf) / standard deviation

The 2002 law designed to improve corporate governance is titled the _____ . Pension Reform Act ERISA Financial Services Modernization Act Sarbanes-Oxley Act

Sarbanes-Oxley Act

answer to previous question explanation

Since firms and markets operate in a broader economy, the economy as a whole will impact each company and market. Therefore, if the economy is slowing, this means that companies within that economy will have a harder time growing relative to a time when the economy is growing - all else equal. Also, as the economy declines, so do interest rates (all else equal)... There is a high correlation between GDP growth and both equity returns and bond yield (as seen in your notes). Because of this, Growth Stocks would likey decline (or grow less) in a slower economy and would therefore be less attractive investments. In addition, lower interest rates means that bond prices are likely to rise and have a positive return.

Leverage ratios

Structure and debt vs equity capital - debt to equity -equity multiplier -interest coverage ratios

Strong believers in the Efficient Markets Hypothesis will most likely:

Take a passive investment approach

We recently discussed that the Federal Reserve started purchasing Treasury Bonds in the Market. What Three things are true about this type of action by the Fed? Select the answer where all three answers are true.

The action was: a monetary policy / an easing policy / a form of open market operations

Describe the relevance of the cargo ship (below). What was this supposed to represent and remind you of with regard to the economy? Please write 2 or 3 sentences.

The economy is always headed in a certain direction, and there are indicators that are present to tell us whether that direction is heading north or south (good/bad). With economic statistics, indicators and federal government policies, we can make predictions as to where the economy is heading.

Please write a few sentences to describe what the sharpe ratio is and why it is important in evaluating portfolios in the "mean variance" context.

The sharpe ratio is extremely important for measuring risk vs. reward. Another term for this is "risk budgeting." Sharpe Ratio is simply the risk premium (return) divided by the risk (standard deviation). This measure is applicable to individual stocks in addition to portfolios (including the "market portfolio" Rm . When you decide to take on risk in a portfolio (via volatility or standard deviation of returns), you need to ensure you are receiving the highest reward possible per unit of risk. This is what the sharpe ratio is calculating. It gets to the "efficiency" of your investment. Return can measured by the market risk premium (Expected Return on a risky asset (Rm) - Risk Free Rate (Rf) and the Risk is measured by the standard deviation of the returns of the risky asset or portfolio. Returns can also be for individual investments (Apple, Nike, etc...). Additionally, this framework applies to ALL investment types (including bonds,etc...).

A top-down analysis of a firm's prospects starts with an analysis of the ____.

U.S. economy or even the global economy industry

For the USD/JPY currency, a stronger US currency means what?

USD/JPY goes from 105 to 110

Suppose you short-sell 100 shares of IBX, now selling at $200 per share. A) What is your maximum possible loss? B) What happens to the maximum loss if you simultaneously place a stop-buy order at $210?

Unlimited; (200-210)*100shares= -1000

Glass-Steagall Act

Until 1999, prohibited banks from both accepting deposits and underwriting securities. It forced a separation of the investment and commercial banking industries. When repealed, many large commercial banks began to transform themselves into "universal banks" that could four a full range of commercial and investment banking services

a low equity multiplier means

a company is using more equity and less debt to finance the purchase of assets

initial unemployment claims (key leading indicator)

a growing amount of people filing for unemployment indicates a potential downtrend one economic activity. lower new job growth is an indicator for GDP also

leading indicators

activity which increases or declines ahead of GDP. These metrics/statistics are most heavily monitored by investors and economists in analyzing the direction of the economy

Financial intermediaries exist because small investors cannot efficiently _________. diversify their portfolios gather information assess and monitor the credit risk of borrowers all of the options

all of the options

Short sale

allows investors to profit from a decline in a security's price. An investor borrows a share of stock from a broker and sells it. Later, the broker must purchase a share of the same stock in order to replace the share that was borrowed. (covering the short position)

non financial leverage (key leading indicator)

amount of leverage in the economy unrelated to financial firms (who typically use leverage as part of their main business). as this figure increases, this will be a negative projected impaction the economy

Over the counter market (dealer markets)

an informal network of brokers and dealers who negotiate sales of securities; roughly 35,000 securities trade on this

Real assets

assets used to produce goods and services; material wealth of a society is determined by the productive capacity of its economy. ex: land, buildings, equipment, knowledge used to produce goods and services

liquidity ratios

available resources to satisfy short term obligations - current ratio - quick ratio - cash ratio

dark pools

block trading today has been displaced to a great event by dark pools- trading systems in which participants can buy or sell large blocks of securities without showing their hand

financial intermediaries

bring together the suppliers of capital (investors) with the demanders of capital (primarily corporations and federal government)

market orders

buy or sell orders that are to be executed immediately at current market prices

GDP measured

by annual growth rate

Indirect financial intermediaries

firms aggregate assets from multiple clients and lend (invest) in larger amounts... diversify capital... investment companies, pension funds, hedge funds, insurance companies, credit unions

investment bankers

firms specializing in the scale of new securities to the public, typically by underwriting the issue (primary markets)

Which of the below would you AVOID if you believe the economy was going to decline in the next three years (all else equal)?

firms with higher debt/equity ratios

Relative Value Analysis

focus on finding assets that are cheap or expensive relative to how "comparable" similar equities are being priced in market. In comparing firms, we use a standardized value - you will want to compare financial ratios to the overall market, but specifically, the industry and the competitors within the industry. This gives you a sense of the strength/weakness of your firm(s) relative to others.

real assets

generate net income for the economy

The two-stage dividend growth model evaluates the current price of a stock based on the assumption a stock will:

grow at a fixed rate for a period of time after which it will grow at a different rate indefinitely.

If you believe the economy is about to go into a recession, you might change your asset allocation by selling _______ and buying ______.

growth stocks; long-term bonds

Which of the below would likely perform BEST in an Economic Contraction (all else equal)?

high dividend paying stocks - the price return portion of the total return of a stock is more volatile than the dividend (or income) portion of the return. Therefore when the economy is in decline (contraction), price changes are more negative while dividend income remains more steady. Which means, returns of stocks with higher dividends are less volatile than lower dividends and in a lower return environment.

Which of the below would perform BEST in an Economic Recovery (all else equal)?

high operating leverage firms

GDP and stocks are

highly correlated

Financial institutions that specialize in assisting corporations in primary market transactions are called _______. mutual funds investment bankers pension funds globalization specialists

investment bankers

A growth stock

is any share in a company that is anticipated to grow at a rate significantly above the average growth for the market

Valuation Ratios

is the firm over or undervalued? - price to earnings - price to book - price to free cash flow

Algorithmic trading

is the use of computer programs to make trading decisions

a weak currency

makes imports more expensive and exports become cheaper for other countries (vice versa)

Price to Earnings Ratio

market price of stock/ earnings per share Investors commonly use the forward earnings (estimate of net years earnings)- provides a measure for how much of a premium investors place on the earnings of a particular firm - tells us the price of the stock vs net income - Research demonstrates that stocks with lower P/E ratios outperform firms with higher P/E ratios with similar risk (i.e. similar betas)

Price to book

market price of stock/book value per share Provides a measure for the ratio of the market price vs. the intrinsic value of the firm - Research demonstrates that stocks with lower price/book ratios outperform stocks with higher price/book ratios - after controlling for risk

lagging indicators

metrics/statistics which tend to show direction after the GDP direction has been indicated

high financial leverage =

more sensitive to business cycles - have higher debt/equity ratios (<40%) and debt/total assets (>50-60%)

The annual dividend yield is computed by dividing _____ annual dividend by the current stock price.

next year's

formula for degree of operating leverage

percent change in EBIT/ percent change in sales

A big increase in government spending is an example of a _________ and likely has a ________________ impact on GDP?

positive demand shock / positive Explanation: If the government is spending more money in the economy, it is providing more funds/money in the economy. Additional resources creates a higher demand for consumers/businesses as there are more resources. This is a positive effect for the economy. It is also a fiscal policy.

Top down approach

primary driver of a portfolio's return; decision making revolves around best asset class allocation; starting with the largest items of the project and breaking them into subordinate items

Dupont Identity provides a picture of the firm's

profitability, leverage and turnover

What would likely happen to 5year Treasury yields if we had very bad economic news tomorrow?

rates would go lower

Financial leverage

refers to firms who have high debt levels relative to their capital in the firm. firms with higher debt loads (financial leverage) still need to pay their debts even if the economics of the industry are slower

operating leverage definition

refers to how costs are distributed between fixed and variable costs

Fiscal policy

refers to the gov't's spending and tax action; is part of "demand-side management" - most direct way to either stimulate or slow the economy

EV: Enterprise Value

refers to the net value of a firm after considering debt and cash = Market capitalization(common) +debt - cash - tells us what the entire firm is worth vs operating earnings

cyclical

some industries are highly sensitive to changes in the economy (more discretionary items like entertainment, travel, jewelry) - restaurants, clothing, housing, rentals/mining, financial services, insurance, retail, entertainment -expansion rotation

defensive

some industries are not very sensitive to business conditions (think of consumer staple goods like Ketchup, toothpaste) - alcohol, condiments, healthcare, utilities, pharmacy, tobacco, education, medical devices - contraction rotation

dealer markets

thousands of brokers registers with the SEC as security dealers; quote prices at which they are willing to sell or buy

Intrinsic Value

we can estimate the instruct value by using DDM or DCF Method. allows you to compare market levels for analysis

Absolute Value

you'll want to make a decision as to the absolute level of the metric to see if it is a strong indicator for that firm regardless of the competition ex: A firm that has a 1% profit margin with a 92x PE ratio isn't all that attractive on an Absolute Value basis. It may be better than some in the industry, but on its own, it doesn't appear to be an attractive investment.