Term
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Definition
| A growth company is one that consistently selects projects that earn higher returns than required for their level of risk. |
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Term
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Definition
| A growth stock is one that earns above-normal risk-adjusted returns |
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Term
| What is a defensive company? |
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Definition
| A defensive company has earnings that are insensitive to economic recessions. |
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Term
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Definition
| A defensive stock is one that declines less than the market when the overall market is declining (low beta stocks) |
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Term
| Define a cyclical company |
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Definition
| A cyclical company has earnings that are sensitive to the business cycle |
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Term
| What is a cyclical stock? |
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Definition
| A cyclical stock has returns that increase and decrease more than the overall market (high beta stocks) |
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Term
True/False
A speculative company has assets with high risk and the potential to generate high earnings. |
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Definition
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Term
| What is a speculative stock? |
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Definition
| A speculative stock has a large probability of low or negative returns and a small probability of very high returns |
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Term
True/False
A growth stock has low expected earnings growth, a high P/E ratio and a high price-book ratio |
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Definition
FALSE
A growth stock has HIGH expected earnings growth, a high P/E ratio and a high price-book ratio |
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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 |
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Definition
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Term
| How does a company estimate earnings per share? |
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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 |
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Term
True/False
Is Expected return < required return for a growth stock? |
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Definition
FALSE
Required return < expected return for a growth stock |
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Term
TRUE/FALSE
A growth company's sotck can have below-average risk adjusted returns |
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Definition
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Term
True/False
A growth company can be over- or undervalued |
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Definition
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Term
True/False
A growth company has above average investment opportunities |
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Definition
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Term
| Stock valuation is correct if the expected rate of return is ______ the required rate, buy the stock; it's underpriced |
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Definition
| Stock valuation is correct if the expected rate of return is > the required rate, buy the stock; it's underpriced |
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Term
True/False
A speculative company has low risk assets |
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Definition
False
A speculative company has HIGHLY risky assets |
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Term
| Stock valuation is correct if the expected rate of return is ______ the required rate, don't buy the stock; it's overpriced |
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Definition
| Stock valuation is correct if the expected rate of return is < the required rate, don't buy the stock; it's overpriced |
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Term
True/False
A speculative stock has a low probability of earning a market rate of return |
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Definition
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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? |
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Definition
24-22+.60/22 = .118
= 11.8% |
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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? |
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Definition
(P/E) = (D/E)/(k-g)
.40/(.12-.05) = 5.70
5.70*10 = $57.00 |
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Term
| What are the 4 types of structural changes to an industry? |
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Definition
- Demographics = age and population changes. Income and ethnicity distributions. Trends in the geographical distribution of populations
- Lifestyles = increases in meals consumed outside the home. Catalog sales. Trends in consumer "styles"
- Technology = can affect both spending habits and how products are distributed, and increase production and margins
- Politics and Regulation = Tariffs, terrorist activities, Regulation/de-regulation of products
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