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Study Session 14: Equity Analysis and Valuation

Herding vs info. cascade

Is the only difference between herding & info.cascade, that with respect to info cascade, uninformed investors follow/mimic the the informed ones. While in herding, investors follow/mimic each other regardless whether the followers (leaders) are less informed (more informed) ??

Applications of the DDM Model

Please assume a $1 dividend and a net income range of $(-10) ~ $10.

(1) Can the dividend discount model be used when dividends are constant?

(2) Can the dividend discount model be used when dividends are constant while income varies but stays positive for more than a year (e.g. 2, 3, or 4 years)?

(3) Can the dividend discount model be used when dividends are constant while income varies but is negative for more than a year (e.g. 2, 3, or 4 years)?

Dividends and Valuation Models

Please assume a $1 dividend and a net income range of $(-10) ~ $10.

(1) Can the dividend discount model be used when dividends are constant?

(2) Can the dividend discount model be used when dividends are constant while income varies but stays positive for more than a year (e.g. 2, 3, or 4 years)?

(3) Can the dividend discount model be used when dividends are constant while income varies but is negative for more than a year (e.g. 2, 3, or 4 years)?

Equity Valuation Methods and Inferences

If all the methods of equity valuation yield varying results,

(1) how must I come to a conclusion of what value an equity security holds?

(2) and on what basis would I have to prefer one valuation method over another?

Treasury shares and retired shares

Hi,

I would like to ask a couple of questions below. 

1) Are treasury shares included in market capitalization and EV calculations? Generally/in textbooks it should not be included. However, some analyst reports include while others don’t. Further, treasury shares should be excluded from the EPS calculations? Is this always the case, or does it depend on country? I know Japanese listed companies exclude treasury shares in their EPS calculations - would like to check for other countries. 

Convertible securities will increase number of shares outstanding if converted?

Hello everyone,

It seems like it is a must that the company will issue new shares when its convertible securities holders decide to convert (like, we don’t apply treasury stock method for these convertible securities when calculating diluted EPS whereas we do with stock options). And it is stated that, in the case of convertible preference shares, the company usually wants to prevent the decrease in share price by offering to buy back the converted shares.

Contrarian Effect and Value Tilt

Hey guys.

I have never understood completely how it works the contrarian effect and value tilt on fundamentally weighted index, and while searching, I haven’t found any clear answer for this.

Can someone please share some insight?

Thanks!

2- stage DDM

Hi -

This questions has been discussed in another thread but I am not sure I understand as explained in the Schweser solutions (Exam 1 - Afternoon session solution).

Question:

Industry life cycle question

Option B sounds right..  curve decline will experience excess capacity which means a decrease in the utilization of capital equipment?

Which of the following statements concerning companies in different industry environments is most accurate?

A.Companies in mature industries tend to focus on efficiency gains and gain market share through superior products.

B. An industry’s experience curve declines with a decrease in the utilization of capital equipment and spreading overhead over a fewer number of units.

Return on Equity Calculation. Can anyone please explain?

Hi

Just an example, 

Say an investor invests $1M in purchasing a land. To purchase the land, the investor had to pay a tax of $50K. So, his total investment becomes $1.05M. Now, he tells his friend who is a real estate agent to construct a building and sell the building. His friend accepts to help and agrees to construct and sell it for him and give him the profits back. The friend does the same and returns the profit of $500K to the investor.