Outline-7 - Ec 173A FINANCIAL MARKETS O UTLINE Foster UCSD...

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Ec 173A – FINANCIAL MARKETS LECTURE OUTLINE Foster, UCSD October 21, 2010 TOPIC 7 – EFFICIENT MARKETS HYPOTHESIS A. Stock Analysis 1. Corporate Accounting in 5 Minutes: a) Accounting and financial ratios. b) The Income (aka Profit and Loss) Statement -- = TR TC. π c) The Balance Sheet -- Assets Liabilities = Equity. d) Some ratios: Income Statement 20XX Revenue = TR Cost+Tax = TC 1,000 900 Net Earnings = π 100 Preferred Dividends Earnings on Common Common Shares = N c EPS $0 $100k 25,00 0 $4 Balance Sheet (31 DEC 20XX) A SSETS L IABILITIES Current Assets Short Term Debt Long Term Debt Fixed Assets: Plant Equipment Structures Total = $400m C OMMON E QUITY Capital + Ret. Earn. Total = $500m Total = $100m
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Ec 173A EMH p. 2 of 7 2. Picking Winners and Losers: a) Stock analysts. b) Technical analysis. [Fig. 1] c) Fundamental analysis. 3. Discounted Cash Flow Models: a) DCF. b) The discount rate. c) Intrinsic value vs. market price. P t P t t t Uptrend Buy! Pierce neckline Sell! Fig. T T T t t t r CF r CF r CF r CF V ) 1 ( ) 1 ( 1 ) 1 ( 2 2 1 1 0 + + + + + + = + = = P P P E CF E r r CF E P value Intrinsic P P P E CF E r r CF E P price Market t T t t t T t t t ˆ ˆ ) ( ) ( ˆ ) ˆ 1 ( ) ( ˆ : ) ( ) ( ) ( )] ( 1 [ ) ( : 1 1 0 0 1 1 1 0 - + = + = - + = + = = = μ μ
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Ec 173A EMH p. 3 of 7 4. Some Common DCF Models of Stock Prices: a) The intrinsic value P ˆ . b) The constant dividend (zero-growth) model. c) Constant dividend growth rate (Gordon) model. d) Variable dividend growth model.
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