3%20-%20Equity%20Security%20Analysis - BANK 3004 Portfolio...

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BANK 3004 Portfolio and Fund Management Page 1 of 8 Topic 3 – Equity Security Analysis © H. Bassan, 2009 Topic Overview We can specify the broad determinants of share prices. A valuation model aims to use some of these determinants to value or select shares. We use a set of observations or forecasts about the company and the economy to estimate the value of a share. In this topic, we learn about some of the widely used approaches to security valuation. The price of a share is based on the firm‟s future cash flows or dividends or earnings. We employ fundamental analysis to try to determine the pattern, risk and value of future cash flows or earnings – the determinants of value. Fundamental analysis first considers the environment in which the firm operates – the wider economy and then its industry. The approach then proceeds to firm-specific analysis – using valuation models that analysts use to uncover mis-priced stocks as well as using financial statements to obtain information that can help us to estimate intrinsic value. This is the top-down approach to security analysis – economic, then industry and finally firm-level analysis. You have an opportunity to review, integrate and use what you have learnt in your previous courses such as economics (economic indicators, business cycles, demand/supply factors, industry structures), finance (valuation models, operating leverage, financial leverage), management (business strategy), accounting (financial statement information, financial ratios) and marketing (industry life-cycle). Finally, we investigate the role of information in the financial markets as we expect stock prices to reflect this information in some manner. This investigation leads to the important concept of market efficiency – the idea that current prices fully reflect all the available information. We consider the implications of market efficiency for investment policy. We review some evidence for and against market efficiency. Learning Objectives After studying this topic, you should be able to: 1. Explain the relationships between economic activity, monetary policy and security markets. 2. Use economic indicators to determine the economy‟s impact on firms‟ activities and identify business cycles. 3. Analyse factors specific to industries and industry life cycles to identify their impact on the performance and risk of firms. 4. Perform a company analysis in the context of the economic and industry conditions using the framework for fundamental analysis. 5. Understand valuation fundamentals and apply basic techniques (discounted dividend, multiples and earnings based models) used to value companies. 6. Use financial statement information to understand the business (its product market strategies and financial policy) and calculate financial ratios to understand the profitability, growth potential, risk profile and financial structure of the firm. 7.
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This note was uploaded on 10/19/2011 for the course BANK 3004 taught by Professor Hb during the Three '10 term at South Australia.

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3%20-%20Equity%20Security%20Analysis - BANK 3004 Portfolio...

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