FE-1 Equity flashcards
FE-1 Equity · Build recall with a focused review session.
32 cards. Read the term and the definition here. The deck at the top of this page is optional.
- Common stock residual claim
- Common shareholders receive earnings and assets only after debt holders and preferred shareholders are paid, and they typically hold voting rights on board elections.
- Limit order
- An order to buy or sell only at a specified price or better. A buy limit sits below the market; a sell limit sits above it.
- Maintenance margin
- The minimum equity percentage an investor must keep in a margin account after purchase. Falling below it triggers a margin call for additional funds.
- Depositary receipt
- A negotiable certificate issued by a bank representing shares of a foreign company, letting local investors trade foreign equity in their own currency and market.
- Holding-period return
- Total return over a period equals price change plus dividends received, divided by the beginning price, expressed as a percentage.
- Intrinsic value
- The present value of expected future cash flows discounted at a rate reflecting risk. It may differ from observed market price.
- Gordon growth model
- Values a stock as next year's dividend divided by the difference between required return and constant growth, valid only when growth is below required return.
- Enterprise value
- Market value of equity plus debt and preferred stock minus cash. It represents the total claim on the operating business independent of capital structure.
- DuPont decomposition
- Return on equity equals net profit margin times asset turnover times financial leverage, isolating profitability, efficiency, and leverage as separate drivers.
- Free cash flow to firm
- Cash available to all capital providers: operating cash flow minus capital expenditure plus after-tax interest expense. Discounted at WACC to derive enterprise value.
- Quality of earnings
- The degree to which reported net income is backed by operating cash flow. A persistent gap between income and cash signals accrual risk.
- Common-size statements
- Financial statements where each line is expressed as a percentage of revenue or total assets, enabling comparison across firms of different size.
- Weighted average cost of capital
- The blended required return on a firm's debt and equity, weighted by market values, used to discount free cash flow to the firm.
- Sustainable growth rate
- Growth achievable without new external equity, equal to return on equity multiplied by the earnings retention ratio, or one minus payout.
- Terminal value
- The present value at the end of the forecast horizon of all cash flows beyond it, usually computed with a constant-growth formula.
- Free cash flow to equity
- Cash available to common shareholders after reinvestment and net borrowing, discounted at the cost of equity to derive equity value directly.
- Forward price-to-earnings
- Current share price divided by expected earnings per share for the next twelve months. Compare only among firms with similar growth and risk.
- EV/EBITDA multiple
- Enterprise value divided by earnings before interest, taxes, depreciation, and amortization. It is capital-structure neutral but ignores capital expenditure needs.
- Justified P/E
- The price-to-earnings ratio supported by fundamentals: dividend payout ratio divided by the difference between required return and growth.
- PEG ratio
- Price-to-earnings ratio divided by the expected earnings growth rate. Lower values suggest cheaper valuation relative to growth, but risk is ignored.
- Target price
- The analyst's expected share value at a stated horizon, derived from an explicit valuation method, used to compute expected upside versus current price.
- Investment thesis
- A concise, falsifiable argument for why market price will move toward intrinsic value, naming catalysts, required evidence, and disconfirming signals.
- Catalyst
- An identifiable event such as an earnings release, product launch, or regulatory decision expected to move price toward the analyst's target.
- Rating scale
- A firm's Buy, Hold, and Sell categories mapped to expected total return versus a benchmark over a defined horizon, with thresholds stated explicitly.
- Portfolio beta
- The weighted average of individual asset betas, measuring the portfolio's sensitivity to market movements and used to estimate required return.
- Diversification benefit
- Risk reduction from combining assets whose returns are imperfectly correlated. The lower the correlation, the greater the reduction for a given expected return.
- Sharpe ratio
- Portfolio excess return over the risk-free rate divided by the standard deviation of returns, measuring reward per unit of total risk.
- Tracking error
- The standard deviation of the difference between portfolio and benchmark returns, quantifying how closely a portfolio follows its benchmark.
- Information ratio
- Active return divided by tracking error. It measures how efficiently a manager converts active risk into excess return over the benchmark.
- Alpha
- The difference between a portfolio's actual return and the return required by its beta under the capital asset pricing model.
- Margin call
- A demand for additional cash or securities when account equity falls below the maintenance margin requirement after adverse price movement.
- Two-stage dividend model
- A valuation approach using an explicit high-growth forecast period followed by a constant-growth terminal value, discounted back at the cost of equity.