Finance 511 Lecture Two - LECTURE TWO: EIC ANALYSIS To...

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LECTURE TWO: EIC ANALYSIS To value a firm’s equity (common stock) we must be able to forecast future earnings and the dividends that will be paid from these earnings. This is the heart of fundamental analysis. Because a firm’s earnings are tied to events in the global economy, a forecast of the economic outlook is a necessary first step in any fundamental analysis of a firm’s value. OVERVIEW: I. MACROECONOMIC VARIABLES: 1. Inflation – consider a firm’s balance sheet and income statement. Inflation will impact revenues, operating costs, maintenance expenses, additional investments, taxes, etc. through inflation’s impact on prices. 2. Exchange rates – sales of imports and purchases of exports are greatly influenced by exchange rates. Companies that invest internationally are clearly sensitive to exchange rate movements. 3. Interest rates – higher interest rates stimulate greater saving, discourage borrowing, and increase the cost of capital. Interest rates will direct the flow of funds around the world. 4. Wages – industries prefer to invest where labor costs are lower. 5. Benefits – industries prefer to invest where guaranteed benefits are lowest. 6. Taxes – industries prefer to invest where taxes are lowest. 7. Regulation – industries prefer to invest where regulation is lowest. 8. Political unrest/uncertainty – industries prefer to invest where governments are stable. 9. Reactive behavior – industries prefer the rule of law 10. Competition – Firms prefer less competition 11. Commodity prices – firms prefer lower commodity prices! 12. Protectionism – Firms love benefiting from it; hate combating it. You get the idea. These variables are not independent!! Analysis of Alternative Economies and Security Markets Objective: Decide how to allocate investment funds among countries and within countries Analysis of Alternative Indutries Objective: Based upon the economic analysis, determine which industries will prosper and which will suffer Analysis of Individual Companies Objective: Determine which companie will prosper and which will suffer
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A. GDP Growth – Emerging Markets Stock Returns Growth in GDP R Local USD Argentina 7.7% 7.2% 4.1% Brazil 4.7% 42.1% 68.0% China 11.5% 125.1% 133.8% Hong Kong 6.2% 46.8% 47.2% India 8.0% 35.8% 51.9% South Korea 4.9% 38.3% 40.1% Venezuela 6.5% (28.8%) 10.8%
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1. Demand Shocks – an event that affects the demand for goods and services
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Finance 511 Lecture Two - LECTURE TWO: EIC ANALYSIS To...

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