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Technicians examine past trends and patterns that exist in the financial markets to determine the direction markets and investments will move in the future |
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Fundamentalists evaluate the economy, the industry, and the firm to determine the firm’s true value |
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what is a business cycle? |
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the movement in aggregate economic activity as measured by the gross domestic product (GDP) |
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why do analysts monitor the business cycle? |
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Forecasting business cycles to determine when to expect changes in the business cycle, or the direction in which aggregate economic activity is moving |
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increasing economic activity |
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decreasing economic activity |
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two consecutive quarters of economic contraction, or decline, in the GDP |
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types of economic indicators |
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Leading economic indicators economic measures that tend to move prior to, or precede, movements in the business cycle
Coincident indicators economic measures that tend to mirror, or move at the same time as, business cycles
Lagging economic indicators economic measures that tend to move after, or follow, movements in the general economy (business cycles) |
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importance of fiscal policy |
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Fiscal Policy Government spending, which is primarily supported by the government’s ability to tax individuals and businesses |
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importance of deficit spending |
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Deficit spending situation that occurs when the government spends more than it collects in taxes |
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phases of the industry life cycle |
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1. industry sales 2. introductory 3. expansion (growth) 4. mature |
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• Ways to use financial statement analysis |
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Financial statement analysis comparison to other similar firms forecast direction for future predict earnings and dividends risk evaluation |
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• How and why to use P/E ratios |
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• Importance of using graphs to determine trend line penetration |
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• General rules for investing |
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Be disciplined with your investment approach Know the company in which you invest Choose firms that are in strong financial positions Stay with the investment until it no longer satisfies your investment goals |
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• Reasons for and Impact of Globalization |
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o Improvements in transportation and communications o Political clout of consumers o Cost of developing new products has increased |
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o Sustainability is about going beyond the company’s immediate and current stakeholders to consider the total future impact of operations and policies. Businesses should plan for the future, and responsible behavior is necessary for long term success. |
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o “Lean manufacturing” is a term that comes from manufacturing, but applies to all elements of the business. Whether it is production, service, or financial reporting, efficient methods should be used to minimize the resource cost. o |
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o –fixed payment - but not obligated o –no voting rights (does not dilute ownership) o –higher after-tax cost since dividends are not deductible expenses o |
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–no obligation of dividend payments –no maturity date for “repayment” –increases creditworthiness –prospects affect terms (can be better than debt) –gives control to stockholders –shares the income of the firm –higher costs of distribution than debt –dividends are not deductible |
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instruments traded mature in one year or less |
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includes instruments with maturities greater than one year |
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loans - treasury, corporate, mortgage-backed, money market, municipal, etc... |
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corporations raise funds by issuing new securities |
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securities are traded among investors after they have been issued |
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—Options, futures and swaps are securities whose values are determined, or derived directly from other assets —Derivatives can be used to manage risk or to speculate |
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all information contained in past price movements is fully reflected in current market prices • —information about recent or past price trends is of no use when searching for abnormal returns |
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Semistrong-form efficiency |
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—current market prices reflect all publicly available information —financial analysis is of no use for consistently finding mispriced securities —insiders can profit on their own company’s stock |
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—current market prices reflect all pertinent information, whether publicly available or privately held —even insiders cannot earn abnormal returns |
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• Importance of the Federal Reserve System |
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• —Manages the monetary policy of the country • —Decentralized network of regional, district banks • —Supervised by the Board of Governors, who are appointed by the President |
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• Fractional Reserve Banking System |
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to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates |
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A premium for expected inflation that investors add to the real risk-free rate of return |
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Difference between the interest rate on a U. S. Treasury bond and a corporate bond of equal maturity and marketability Compensates for risk that a borrower will default on a loan |
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Premium added to the rate on a security if the security cannot be converted to cash on short notice and at close to the original cost |
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Premium that reflects the interest rate risk Bonds with longer maturities have greater interest rate risk Reinvestment rate risk is greater for short-term bonds |
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multinational corporations |
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• —Operate in more than one country • —To seek new markets • —To seek raw materials • —To seek new technology • —To seek production efficiency • —To avoid political and regulatory hurdles |
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• Advantages of a Corporation |
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• —Separate and distinct from its owners • —Unlimited life • —Easy transferability of ownership • —Limited liability |
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Disadvantages of a Corporation |
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• —Setting up and filing state and federal reports is complex • —corporate charter is filed with the state providing information about the company and directors • —bylaws are for internal management and procedures • —Earnings are subject to double taxation • |
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o an analysis of a firm’s financial ratios over time o used to determine improvement or deterioration in its financial situation |
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• Comparative ratio analysis (benchmarking) |
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an analysis based on a comparison of a firm’s ratios with those of other firms in the same industry |
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• Uses of and limitations to ratio analysis |
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• rSIMPLE = Simple (Quoted) Rate |
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used to compute the interest paid per period |
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• EAR = Effective Annual Rate |
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the annual rate of interest actually being earned |
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• APR = Annual Percentage Rate |
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rSIMPLE periodic rate X the number of periods per year |
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• Periodic rate = rPER = rSIMPLE |
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m, where m is number of compounding periods per year. m = 4 for quarterly, 12 for monthly, and 360 or 365 for daily compounding. |
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An analytical technique for studying the relationship among sales revenues, operating costs, and profits
Only deals with the operating section of the income statement |
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Value is based on present value of: stream of interest payments principal repayment at maturity |
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