FIN 420 STANDARD EXAMS ANSWERS AND
QUESTIONS SET A+
✔✔Determine if a stock is overvalued or undervalued - ✔✔The P/E ratio determines the
market price of a stock by comparing the firm's earnings with an industry average P/E
(or peer comparison). This valuation method is useful when a firm does not pay a
dividend, and when the price investors pay for earning per share (EPS) is relevant.
Company P/E < Industry P/E = Undervalued | Company P/E > Industry P/E =
Overvalued
✔✔Characteristics of alternatives, tangible, gold, natural resources - ✔✔Gold has an
inverse relationship with stock prices (negative correlation). Historically it has been
viewed as a safe haven in times of economic distress. Countries with high inflation will
hold gold rather than their currency. Gold does not pay interest. When high-interest
environments persist, investors prefer bonds to gold.
1. Directly purchase of gold exposure - Storage issues - ETF investment vehicle issues
2. Indirect gold exposure through the purchase of mining stocks - Volatile mining stocks
- International stock issues - Inefficient operating costs
Natural resources include oil and gas assets, and timberland. Often oil and gas assets
have pass-through benefits. Returns are enhanced when demand is greater than
supply. They act as a good diversifier because prices are often inversely related to
stock prices, especially when inflation is higher. Emerging markets also contribute to
rapid growth in natural resource sectors.
Natural Resource Investment
1. Limited partnerships involved in land purchase
2. Stock purchases of natural resource companies
3. Mutual fund purchase of portfolios of natural resource companies
✔✔Intrinsic value models - ✔✔No-growth Discount Model | Constant Growth Dividend
Discount Model | Multi-state Growth Dividend Discount Model
✔✔G= ROE x RR - ✔✔ROE = NI/e
A=L+E
, ✔✔Relative Value Methods (didn't pay dividend, had to use this) - ✔✔- Price-to-
Earnings (P/E) Ratio | Price-to-Earnings by Growth (PEG) Ratio | Price-to-Sales (P/S)
Ratio
✔✔Price-to-Sales (P/S) Ratio determines the market price of a stock by comparing the
firm's sales with an industry average P/S (or peer comparison). This valuation method is
useful when - ✔✔neither earnings nor dividends are relevant, and when the price
investors pay for sales, or the firm's revenue stream, is relevant. Company P/S <
Industry P/S = Undervalued | Company P/S > Industry P/S = Overvalued
✔✔rental properties - ✔✔Residential rental: A building rented by people to live in.
- Single-family home
- Apartment
- Condominium
- Hotels
Commercial real estate: A building rented by people to run a business.
- Office
- Shopping centers
- Banks
- Restaurants
- Retail stores
- Industrial warehouse
✔✔REMIC - ✔✔A real estate mortgage investment conduit (REMIC) is a self-liquidating,
flow-through entity that invests through real estate mortgages or mortgage back
securities. The REMIC terminates when the underlying mortgages have been paid. A
common REMIC is a collateralized mortgage obligation (CMO). REMIC characteristics: -
Issues debt securities (bonds) to raise capital to invest in mortgages - Provide monthly
cash flow to REMIC investors ($1,000 to $25,000) - Bond maturity is structured (3 to 30
years) - Pass-through, REMIC is tax exempt - CMOs offer multiclass securities divided
into tranches (A safest, Z riskiest)
✔✔REIT - ✔✔Liquid and marketable: actively traded on exchanges. Corporate structure
with a board of directors. Theoretically can last forever. Loss of purchase power.
- Diversification - Marketability - Federal income tax exempt* (90% earnings distribution,
75% income from real estate) - Inflation hedge - Global real estate exposure - Real
estate philosophy * Exemption is at the REIT level. The investor is still responsible for
capital gains/losses and income taxes. can be like a fixed income bond (stuck at rate)
✔✔RELP - - ✔✔Private: not actively traded on exchanges. Lack liquidity and
marketability. Partnership structure which terminates upon the death of the general
partner. Liquidity and marketability risks.
✔✔Undeveloped land - - ✔✔investments are passive and produce negative cash flows
as a result of no income while maintaining ongoing expense. The investment objective
QUESTIONS SET A+
✔✔Determine if a stock is overvalued or undervalued - ✔✔The P/E ratio determines the
market price of a stock by comparing the firm's earnings with an industry average P/E
(or peer comparison). This valuation method is useful when a firm does not pay a
dividend, and when the price investors pay for earning per share (EPS) is relevant.
Company P/E < Industry P/E = Undervalued | Company P/E > Industry P/E =
Overvalued
✔✔Characteristics of alternatives, tangible, gold, natural resources - ✔✔Gold has an
inverse relationship with stock prices (negative correlation). Historically it has been
viewed as a safe haven in times of economic distress. Countries with high inflation will
hold gold rather than their currency. Gold does not pay interest. When high-interest
environments persist, investors prefer bonds to gold.
1. Directly purchase of gold exposure - Storage issues - ETF investment vehicle issues
2. Indirect gold exposure through the purchase of mining stocks - Volatile mining stocks
- International stock issues - Inefficient operating costs
Natural resources include oil and gas assets, and timberland. Often oil and gas assets
have pass-through benefits. Returns are enhanced when demand is greater than
supply. They act as a good diversifier because prices are often inversely related to
stock prices, especially when inflation is higher. Emerging markets also contribute to
rapid growth in natural resource sectors.
Natural Resource Investment
1. Limited partnerships involved in land purchase
2. Stock purchases of natural resource companies
3. Mutual fund purchase of portfolios of natural resource companies
✔✔Intrinsic value models - ✔✔No-growth Discount Model | Constant Growth Dividend
Discount Model | Multi-state Growth Dividend Discount Model
✔✔G= ROE x RR - ✔✔ROE = NI/e
A=L+E
, ✔✔Relative Value Methods (didn't pay dividend, had to use this) - ✔✔- Price-to-
Earnings (P/E) Ratio | Price-to-Earnings by Growth (PEG) Ratio | Price-to-Sales (P/S)
Ratio
✔✔Price-to-Sales (P/S) Ratio determines the market price of a stock by comparing the
firm's sales with an industry average P/S (or peer comparison). This valuation method is
useful when - ✔✔neither earnings nor dividends are relevant, and when the price
investors pay for sales, or the firm's revenue stream, is relevant. Company P/S <
Industry P/S = Undervalued | Company P/S > Industry P/S = Overvalued
✔✔rental properties - ✔✔Residential rental: A building rented by people to live in.
- Single-family home
- Apartment
- Condominium
- Hotels
Commercial real estate: A building rented by people to run a business.
- Office
- Shopping centers
- Banks
- Restaurants
- Retail stores
- Industrial warehouse
✔✔REMIC - ✔✔A real estate mortgage investment conduit (REMIC) is a self-liquidating,
flow-through entity that invests through real estate mortgages or mortgage back
securities. The REMIC terminates when the underlying mortgages have been paid. A
common REMIC is a collateralized mortgage obligation (CMO). REMIC characteristics: -
Issues debt securities (bonds) to raise capital to invest in mortgages - Provide monthly
cash flow to REMIC investors ($1,000 to $25,000) - Bond maturity is structured (3 to 30
years) - Pass-through, REMIC is tax exempt - CMOs offer multiclass securities divided
into tranches (A safest, Z riskiest)
✔✔REIT - ✔✔Liquid and marketable: actively traded on exchanges. Corporate structure
with a board of directors. Theoretically can last forever. Loss of purchase power.
- Diversification - Marketability - Federal income tax exempt* (90% earnings distribution,
75% income from real estate) - Inflation hedge - Global real estate exposure - Real
estate philosophy * Exemption is at the REIT level. The investor is still responsible for
capital gains/losses and income taxes. can be like a fixed income bond (stuck at rate)
✔✔RELP - - ✔✔Private: not actively traded on exchanges. Lack liquidity and
marketability. Partnership structure which terminates upon the death of the general
partner. Liquidity and marketability risks.
✔✔Undeveloped land - - ✔✔investments are passive and produce negative cash flows
as a result of no income while maintaining ongoing expense. The investment objective
