This

**preview**shows half of the first page. to view the full**1 pages of the document.**Goals of investment: Safety – Income - Growth of capital

Expected return = anticipated return by some investors = risk-free rate (RF) +

expected risk premium

Investment process: decision to invest - choice of investment: risk averseness,

set up investment goals, risk-return analysis – transaction – monitor performance

Important considerations when investing: Nothing is certain – Globalization -

Tech advances (Old Econ vs. New Econ) - institutional investors (vs ind investors) -

Market efficiency - Corporate Governance

Direct Investing: Non-marketable – money mkt – capital mkt – derivatives mkt

Indirect Investing: Investment funds (open and closed end)

Def’n: Options – limited liability….Futures – unlimited liability

Def’n: Investment Taxation: Interest taxed as ordinary income… Dividends

gross up and then apply tax credit… Cap Gains only 50% is taxable, loss can be

carried backwards 3 years and forwards indefinitely

Def’n: Unit Inv. Trust: passive investment; unmanaged, designed to be bought

and held, goal is capital preservation...minimum operating costs… investment

funds can be unit, open-end, or closed-end

Def’n: Red Herring = preliminary prospectus Blue Skied = gain approval

Dividend Yield: income component of return Div/Price D1/P0

Payout Ratio: % of earnings paid in cash to stockholders Div/Earnings OR 1-b

P/E Ratio: earnings multiplier Price/EPS

Bond equivalent yield (BEY) --------------

Bank discount yield (BDY)(used in USA)

Effective annual yield:

Holding period return: HPR = (P1 – P0 + C)/P0

Income tax Rates: <40k: 15%... 40-82k: 22%... 82-127k: 26%...>127k: 29%

Div Tax Credits: 44% gross up, 17.98% tax credit on grossedup… gross up, apply

federal tax, subtract federal tax credit, provincial tax is half of remaining fed tax,

Net Asset Value (NAV): values investment (mutual fund) company shares

Pricing for funds: Open-end = NAV, closed-end = Prem/Discount to NAV… if

NAV>mkt price, selling at discount

When fund has front-end load, price is NAV/(100%-sales charge), ie NAV is 10,

sales charge is 5%, price is 10/95%

Stock Indices: Price-Weighted = avg of stock prices… Mkt Value-Weighted = mkt

cap weighted avg of stock prices… Equally Weighted = avg of stock returns

Price-Weighted Index: inv equal # of sh in each firm; divisor adjusted sometimes

Market Value-Weighted: get RoR/HPR? sum up MV only

*doesn’t auto-adjust 4 splits

Equally Weighted: Arithmetic avg and Geometric avg…X = P1/P0…MUST -1 at

end of both eq’ns to find % RoR

Def’n: DRIP: can reinvest dividends to buy more shares at no add’l cost

Protection agencies: OSC, CIPF, IIROC

Stock purchases are cleared by CDS

Initial Margin: 30% CA, 50% USA…Maintenance: 30% both

Leverage is by 1/margin requirement

Margin Ex.: price of stock drops, but amount of loan stays constant, it’s your equity

that drops with the MV, which drops your margin…how far can price fall before

margin call?

Shortsell Ex.: the total collateral is the value of the stock owed + margin…when

stock price goes up, stock owed goes up meaning the net equity (your original

margin) goes down (margin = equity/stock owed) … margin call price

Valuation Approaches: Book, Acquisition

(liquidation and replacementTobin’s Q: when ratio is near 1, company is trading

close to replacement cost), Intrinsic (DDM, Earnings, FCF), Relative valuation

DDM: no-growth model: P = D0/k … constant growth: P = D1/(k –g)

Estimate guse historicals OR g = ROE×b…keeping b constant, g = earnings

growth rate… b = 1 – D0/EPS0 ... to find PVGO find b g EPS1 k

Note: b = retention ratio/clawback ratio/plowback ratio

Est kuse CAPM:k = rf + beta(km – rf)...not give? Mkt Risk Prm = 5.5%, Rf7.5%

g = expected cap gains yield k = div yield + cap gains yield

Geometric Annual growth rate (g)

Note: don’t use original Div,

use Current Div when calculating based on historicals

Transition Period DDM: find g (of EPS), EPS, Payout Ratio (of D), D, k, possibly

beta, and discount

EPS: IV = PV of constant earnings + PVGO PVcons.earn = EPS1/k PVGO

when g is constant … so P = EPS1/k + PVGO

Free Cash Flow Model:

FCFF = EBIT(1-t) + Depreciation – Capex – Change(NWC) OR

FCFF = NI + NCC – Cap. Ex. – Change(NWC) + I(1 – t)

Vf = FCF/(WACC – g) …Value of Common Equity = Vf – debt

IV of stock = Value of equity / # shares outstanding

FCFE = FCFF – Interest Expense(1-t) + Increase in Net Debt OR

FCFE = NI + NCC – Cap. Ex. – Change(NWC) – Net debt

Relative Valuation Approach: M/B = P0/BV0, BV is per share

P0 = sales per share * justified P/S ratio = sales0 * P/S

P/E Approach: Value of t he stock = next year’s earnings × justified P/E

Estimate justified P/E w/ industry avg, own hist, or regression…Estimate earnings

w/ hist EPS growth, stats Earnings Multiplier = E1 * P0/E1

Regression approach Other Approaches:

EVA = (ROC - WACC) x Capital OR EVA =NOPAT-(WACC*Capital)

MVA = Mkt valu of the firm – Capital more fwd-looking than EVA

Valuation of Preferred Stocks: V = C/k, where C = coupon

ADRs =indirect way invest in foreign firm, GNMA=mortgage ass.

Total Asset TO=Sales/Total Assets ROE=TO*Prof Marg*Equity Multiplier

Profit Margin = Net Income/Sales Equity Multiplier = Total Assets/Total Equity

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