Finance Exam Review: Stock Valuation and Risk Concepts

Dividend Growth Model

A model that determines the current price of a stock as its dividend next period, divided by the discount rate, less the dividend growth rate.

Trading Multiples

A model that compares price to other similar companies.

EBITDA Multiple

Earnings Before Interest, Taxes, Depreciation, Amortization.

Discounted Cash Flow (DCF)

The present value of all future cash flows from a company.

PV60

Present Value of Growth Opportunities.

Standard Deviation

It measures the amount of variation or spread of asset returns from the mean (average) return.

Variance

Is often used in portfolio management to understand the overall risk of a portfolio.

Correlation

It refers to how the returns of two assets move in relation to each other.

Arithmetic Return

Is simply the average of periodic returns, calculated by summing up the individual returns and dividing by the number of periods.

Geometric Return

Is the rate that would be required for an investment to grow from its beginning value to its ending value over a given period, assuming the returns were reinvested.

Strong Form Market Efficiency

Market price reflects all information including insider information.

Semi-Strong Form Market Efficiency

Market reflects all public information.

Weak Form Market Efficiency

All past information is reflected in the market prices.

Systematic Risk

Risk of the market.

Non-Systematic Risk

Risk of the specific company.

Diversification

Adding stocks to a portfolio reduces non-systematic risk.

Beta

Is the measure of risk based on the volatility of stock price.

Market Risk Premium

Is the difference between the expected return on a market portfolio (S&P 500) and the risk-free rate (T-Bills).

Payback Period

How long does it take to recoup your investment.

Discounted Payback

Same as payback but it includes time value of money.

Net Present Value (NPV)

How much shareholder value is added by the project.

Internal Rate of Return (IRR)

What is the annual return of project.

Profitability Index

Comparison of profitability to investment.

Working Capital

Less than 12 months.

Carrying Costs

Cost of high inventory, due to financing, spoilage, or shrinkage (theft).

Shortage Costs

Cost of low inventory, due to loss of specific sale, or loss of future sales.

Transaction Motive

Pay normal bills.

Precautionary Motive

Unexpected expenses (machine replacements).

Financial Motive

Paying maturing debt, paying dividends.

Speculative Motive

Future opportunities.