Making a Stock Watch List

I am taking the time to help others learn the basics in evaluating stocks for investment using both fundamental and technical analysis. Both tools are equally important in making serious decisions with your hard earned CASH!

If you wish to invest in stocks, treat it like a business, NOT A HOBBY. (ex: a retail outfit can't make money if it doesn't have goods to sell; the same goes for investors, without cash, you can't invest). You need rules and you need to follow these rules or money WILL be LOST. Once proven rules have been established, they cannot be broke or you will lose money. Everyone loses money in investing but we must learn to cut losses quick and allow gains to develop. Small losses are acceptable because they teach us lessons that allow us to win big!

Start your search by looking for stocks with superior fundamentals. After fundamentals are established, look to see if this particular stock is in good company, by this I mean a strong industry group - similar stocks, historically move in the same direction (this is fact not opinion). This is not to say every stock in the industry group will move higher or lower because a sister stock is going in that direction (this is a generalization rule). After the industry group has been confirmed strong, determine if overall market is in a specific trend (up, down or sideways).

If you are long a stock, the market must be in a confirmed up-trend, if you are short a stock, confirm a down trend. Note that 75% of all stocks will follow in the direction of the overall market. Don't fight the trend, the market is always RIGHT.

Let the market and the stock dictate how long you will be in a position. Don't worry about time frames; price and volume will tell you when to exit the position as long as you follow rules.

After fundamental have been established, you must study the technical side of each individual stock, the specific industry group and the general market trends. Record if the stock is forming a proper base, if it's about to break out of a base, if it's extended or if it's pulling back to a key support line.

At this point, add any qualifying stock to your watch list or buy the stock according to the technical entry signals (remember the fundamentals have been established earlier).

Key numbers to use in fundamentals:
Earnings (current, past: quarterly, yearly and future estimates)
Sales (current, past: quarterly, yearly and future estimates)
Return on Equity (ROE)
Price/Earnings Growth (PEG)
Price/Earnings Ratio (rise over time of base)
Debt/Equity
Assets, Liabilities
Accumulation/Distribution ratio
Up/Down Volume over past several months
Number of Institutional Holders (is this increasing or decreasing recently)

Key things to use for technical analysis:
Look at the 1 year daily chart
The 1 year weekly chart
Check volume action when bases are formed
Look at Point & Figure charts for support and resistance lines
Look for new 52-week highs

Well Managed Investing Risks Bring Rewards!

"Risk comes from not knowing what you're doing!" Warren Buffett (1930 - )

We often listen to people who hesitate to invest in the stock market because they fear risk. There are older people who fear that a stock crash could leave them destitute. There are young couples who pine for a new home but worry that an investment loss could kill their chances.

For any investor, risk is a fact of life!

Whenever an opportunity opens up for you to make an investment profit, you also face the fear of the possibility of suffering an investment loss. Even with "safe" kinds of investments, such as bank deposits, there is a risk that the rate you earn will not exceed the rate of inflation.

Often, these fears are rooted in a misunderstanding of what risk is. Those who understand market risks --and properly evaluate their ability to tolerate them-- can supercharge their investment portfolios by embracing a certain amount of uncertainty!

In the financial world, risk translates to uncertainty and it's measured by standard deviation from the norm.

Many individuals would say the riskier investment is the first, because their principal would be in greater jeopardy. But to professionals, the first investment is merely stupid --not risky--because it's a sure thing to lose!

Still, what worries many is that you never know when the stock market is going to dive. What if it falls right before you need to sell?

Most individuals measure risk as their chance of loss, but we measure risk by the variability of returns!

In other words, because stocks have higher average returns, you can suffer some losses and still end up vastly ahead over the long run.

There's only one situation in which adding stocks to your portfolio doesn't make sense--when you don't have time to let the market work for you.

In any given year, you have about a 1 in 4 chance of taking a loss in the stock market. If one year or less is as long as you plan to invest, stocks boil down to a gamble.

But if your time horizon is five years or more, there's a very good chance that putting at least a portion of your money in stocks will boost the performance of your investments!

One question you have to resolve is the kind of investment risk you're comfortable taking. The choice ranges from conservative to aggressive, with a broad middle ground between the extremes.

Conservative Investing: Means putting money where there's little risk to principal.

Moderate Investing: Means taking risks by putting money into growth stocks and bonds.

Aggressive or Speculative Investing: Means taking a possible risk of losing part of your investment in exchange for the possibility of making a larger profit.

The ideal risk equalizer is that you should work for balance among the various risk categories.

One of your concerns should also be that if you invest too conservatively, you won't have enough money down the road to afford your goals even if you've been diligent in following your plan.

Another concern is that by taking too many chances you risk losing too much of your capital.

Real Estate Syndicates

Contrary to the belief of some, a real estate syndicate has nothing at all to do with Don Corleone. Take it from me – or my name is not Luigi.

The real estate investment market is becoming more and more complex and, as a result, the traditional boundaries between different investment activities are changing. If someone is interested in buying or selling an interest in land, he generally seeks help from a real estate expert. If someone wants to buy or sell a common stock, he seeks the services of a securities expert. During the past decade there has been a growth of new forms of investment vehicles, the most common of which are known as ‘syndicates’. Syndicates are used in conjunction with many types of assets including real estate, R & D, purchase and management of hotels and motels, oil and gas exploration, livestock and agricultural development to name a few. Specifically as it refers to real estate syndicates, in its simplest definition this term is applied to any form of organization which allows two or more investors to participate in the ownership of an interest in real estate.

In the syndicate, the real estate asset is divided into two or more ‘investment units’ which are acquired by the individual investors. It is important to realize that the investment unit refers to the particular asset that is acquired by the investors, and not the underlying real property itself. The precise nature of the investment unit will depend on the form of the syndicate. In essence, investment units represent a fractionalized ownership of one or more interests in real property rather than direct ownership of an entire interest. While real estate syndicates are formed for a variety of reasons, the typical reason is to create a tax shelter. At the base of the syndicate is the relationship among investors. In all real estate syndicates there is some form of contract specifying the relationship intercurring between the individual investors and the underlying interest in real property.

Despite the multitude of forms, the structure of a real estate syndicate is invariably based upon one of the following six legal relationships: co-ownership, divided ownership, corporation, trust, general partnership and limited partnership. In addition, there are three central participants, or sets of participants, as follows:

[ ] the syndicator or promoter who creates the syndicate in the first place;

[ ] the syndicate manager who manages the syndication and who, often times, is the promoter as well;

[ ] the investors who purchase the investment units.

Moreover, a number of other experts are used that are unrelated to the syndication, such as managers, appraisers, builders, leasing agents and mortgage lenders. In some cases the syndicator may buy the property before creating the syndicate organization. In other cases, the syndicate investment units may be marketed before the real property is acquired.

The allocation of profits and expenses is typical of the real estate industry. For instance, there are ‘front-end’ fees to cover initial expenses for the formation of the syndicate such as:

[ ] mark-up profit on lands sold to the syndicate by the syndicator, if he advanced the initial capital to purchase real estate.

[ ] Real estate commissions on sales to the syndicate by the syndicator.

[ ] Percentage of the initial funds raised by the syndicator.

[ ] Fees for services rendered.

[ ] Fees for guarantees, such as cash-flow guarantees or construction guarantees.

As to the return and liquidity, each investor is entitled to the proportionate share of all leases, rents, resale of the syndicate interests in land and, of course, each investor will have to consider different tax shelter possibilities offered by the six different legal organizations of syndicates. Last but not least, liquidity is an essential factor from an investors perspective, in that investors may want to transfer investment units or portion thereof to someone else at a later date.

There are at times situations wherein a direct ownership in land is neither beneficial nor convenient, and an indirect ownership by way of investment units may be more appropriate. Likewise, as it is the case more and more with large hotel consortiums, original capitalization is done by selling ‘interest shares’ – the equivalent of investment units – to private investors, with the balance of the initial funding obtained by institutional lenders and secured by the real property. Nowadays syndicators have gone as far as raising money in the stock market by selling futures stocks of edifications to come, typically large high-rise and residential towers that cluster the downtown core of practically every metropolis in North America.

Luigi Frascati

The Myth of the Earnings Yield

Abstract

A very slender minority of firms administer dividends. This truism have radical implications. In the absence of dividends, the foundation of most - if not all - of the financial theories we use in order to determine the value of shares, is falsified. These theories trust on a few inexplicit and expressed assumptions:

That the (fundamental) "value" of a share is closely correlated (or even equal to) its market (stock exchange or transaction) price;

That terms motions (and volatility) are mostly random, though correlated to the (fundamental) "value" of the share (will always converge to that "value" in the long term);

That this cardinal "value" reacts to and reflects new information efficiently (old information is fully incorporated in it).

Investors are supposed to price reduction the watercourse of all hereafter income from the share (using one of a countless of possible rates - all hotly disputed). Only dividends represent meaningful income and since few companies engage in the statistical distribution of dividends, theorists were forced to deal with "expected" dividends rather than "paid out" ones. The best gauge of expected dividends is earnings. The higher the earnings - the more than likely and the higher the dividends. Even retained earnings can be regarded as postponed dividends. Retained earnings are re-invested, the investings generate earnings and, again, the likeliness and expected size of the dividends increase. Thus, earnings - though not yet distributed - were misleadingly translated to a rate of return, a output - using the earnings output and other measures. It is as though these earnings WERE distributed and created a tax return - in other words, an income - to the investor.

The ground for the prolongation of this misnomer is that, according to all current theories of finance, in the absence of dividends - shares are worthless. If an investor is never likely to have income from his retentions - then his retentions are worthless. Capital additions - the other word word form of income from shareholding - is also driven by earnings but it makes not have in financial equations.

Yet, these theories and equations stand up in blunt direct contrast to market realities.

People make not purchase shares because they anticipate to have a watercourse of future income in the form of dividends. Everyone cognizes that dividends are fast becoming a thing of the past. Rather, investors purchase shares because they trust to sell them to other investors later at a higher price. In other words, investors make anticipate to recognize income from their shareholdings but in the word form of capital gains. The terms of a share reflects its discounted expected capital additions (the price reduction rate being its volatility) - NOT its discounted hereafter watercourse of income. The volatility of a share (and the statistical distribution of its prices), in turn, are a measurement of outlooks regarding the handiness of willing and able buyers (investors). Thus, the expected capital additions are comprised of a cardinal component (the expected discounted earnings) adjusted for volatility (the latter beingness a measurement of outlooks regarding the statistical distribution of handiness of willing and able buyers per given terms range). Earnings come up into the image merely as a yardstick, a calibrator, a benchmark figure. Capital additions are created when the value of the firm whose shares are traded increases. Such an addition is more than often than not correlated with the hereafter watercourse of income to the FIRM (NOT to the shareholder!!!). This strong correlativity is what binds earnings and capital additions together. It is a correlativity - which might bespeak causation and yet might not. But, in any case, that earnings are a good placeholder to capital additions is not disputable.

And this is why investors are obsessed by earnings figures. Not because higher earnings intend higher dividends now or at any point in the future. But because earnings are an first-class forecaster of the hereafter value of the firm and, thus, of expected capital gains. Put more than plainly: the higher the earnings, the higher the market evaluation of the firm, the bigger the willingness of investors to purchase the shares at a higher price, the higher the capital gains. Again, this may not be a causal concatenation but the correlativity is strong.

This is a philosophical displacement from "rational" measurements (such as cardinal analysis of hereafter income) to "irrational" 1s (the future value of share-ownership to assorted types of investors). It is a transition from an efficient market (all new information is immediately available to all rational investors and is incorporated in the terms of the share instantaneously) to an inefficient 1 (the most of import information is forever lacking or lacking altogether: how many investors wish to purchase the share at a given terms at a given moment).

An income driven market is "open" in the sense that it depends on newly acquired information and responds to it efficiently (it is highly liquid). But it is also "closed" because it is a nothing sum of money game, even in the absence of chemical mechanisms for merchandising it short. One investor's addition is another's loss and all investors are always hunting for deals (because what is a deal can be evaluated "objectively" and independent of the state of head of the players). The statistical distribution of additions and losings is pretty even. The general terms degree amplitudes around an anchor.

A capital additions driven market is "open" in the sense that it depends on new watercourses of capital (on new investors). As long as new money maintains pouring in, capital additions outlooks will be maintained and realized. But the amount of such as money is finite and, in this sense, the market is "closed". Upon the exhaustion of available beginnings of funding, the bubble be givens to explosion and the general terms degree implodes, without a floor. This is more than than commonly described as a "pyramid scheme" or, more politely, an "asset bubble". This is why portfolio theoretical accounts (CAPM and others) are improbable to work. Diversification is useless when shares and markets travel in bicycle-built-for-two (contagion) and they move in bicycle-built-for-two because they are all influenced by one critical factor - and only by one factor - the handiness of future buyers at given prices.

Europe/US Working Capital Survey

The up-to-the-minute study on the workings capital state of affairs of the largest 1,000 European companies by sales uncovers for the twelvemonth 2004 a additional improved performance, with a twelvemonth on twelvemonth driblet of 3.3%. European corps still go on to pay attention to working capital management as a manner to drive liquidness and returns. Each workings capital constituent contributed last twelvemonth to the overall improvement.
A more than refined workings capital analysis shows a higher proportionality of sectors reporting improved twelvemonth on twelvemonth performance, suggesting a lower magnitude in leaden reduction changes. Among those that have got shown the biggest meaningful workings capital improvements last twelvemonth were Aerospace & Defense, Distillers & Brewers, Food Retailers and Telecoms, while Auto Manufacturers, Commodity Chemicals, Electrical Components and Industrial Diversified were level or deteriorated.
A elaborate country analysis uncovers improved DWC performance across nearly every European country. Among the major economies, Italian Republic and the United Kingdom saw the biggest workings capital improvements last year, but their public presentation was more than amalgamated when compared with 2002. French Republic and Germany registered additional DWC reduction, but at a substantially lower rate than in 2003.
While advancement have got been achieved, an initial benchmark and comparative information analysis uncovers that the largest European companies still have in entire stopping point to €480bn of cash unnecessarily tied up in working capital. In addition, implementing best practice workings capital strategy and procedures would also ensue inch annual cost reductions of up to €16bn, translating into an improvement of 3.2% in the sum reported EBIT. The value of this cost potentiality would add an extra 27% to the workings capital cash potential.
The introduction of ‘Collaborative Working Capital Management’ would translate into additional cash and operating cost chances that have got not been factored in our above estimates. Going forward, the workings capital image is likely to be more than discriminating across companies and sectors. A cause for concern is a possible management attention displacement out workings capital towards growing the business, the investment, and the underside line at a clip when corporate liquidness is much improved and the rate of working capital improvement attains a point of diminishing returns.
2005 United States Working Capital Survey
The up-to-the-minute study on the working capital state of affairs of the largest 1,000 United States companies by sales uncovers for the twelvemonth 2004 a additional improved performance, with a twelvemonth on twelvemonth driblet of 2.5%. While showing a lower rate than in 2003, this agency that United States corps still go on to pay attention to working capital management as a manner to drive liquidness and returns. Each workings capital constituent contributed last twelvemonth to the overall improvement.
A more than refined working capital analysisshows a higher proportionality of sectors reporting improved twelvemonth on twelvemonth performance, suggesting a lower magnitude in leaden reduction changes. Among those who have got shown the biggest meaningful workings capital improvements last twelvemonth were Aerospace & Defense, Computers, Containers & Packaging, Cosmetics/Personal Care and Food, and Broadline Retailers, while Air Freight, Pharmaceuticals and Telecoms deteriorated.
While advancement have got been achieved, an initial benchmark and comparative information analysis uncovers that the largest United States companies still have in entire up to $460bn of cash unnecessarily tied up in working capital. In addition, implementing best pattern workings capital strategy and procedures would also ensue inch annual cost reductions of up to $23bn, translating into an improvement of 2.9% in the sum reported EBIT. The value of this cost potentiality would add an extra 40% to the workings capital cash potential.The introduction of ‘Collaborative Working Capital Management’ would translate into additional cash and operating cost chances that have got not been factored in our above estimates.
Going forward, the workings capital image is likely to be more than discriminating across companies and sectors against a background of strong business activity. A cause for concern is also a possible management attention displacement out working capital towards growing the business, the investing and the underside line at a clip when corporate liquidness is much improved and the rate of working capital improvement attains a point of diminishing returns.

Banks and Money

Basic Functions of Banking
The basic mathematical functions of banking are:

The aggregation of finances from the public.

The safeguarding of those funds.

The transfer of those finances from one individual to another without their departure the bank (this is done by agency of checks or automatic transfer through the banking system, or via the Internet etc)

The lending of that money to other political parties for a tax return or reward called interest.

Loans made by a bank are based on the amount of finances held by the bank at any time, after taking into account sums of money that must be held in modesty in lawsuit the proprietors of the finances necessitate them from clip to time.

The loans are, of course, made with proper security in topographic point in lawsuit there is default. The interest received is shared between the bank (i.e. their income for managing those funds) and the true owner. (The true owner's reward is a share of the interest, which is paid to him/her for not using his/her money.)

A bank is therefore an establishment that deals in money, as well as providing other financial services. They accept sedimentations of money from clients and they do loans of those finances to generate a profit. This net income is the difference between the interest they have from the borrowers and the interest they pay to the clients who have the funds.

Banks are indispensable to any country's economic system as well as the human race economy. The mathematical function of banks is to administrate the finances given to their care and using it to do a profit.

What actually happens?
When your money is deposited with the bank, it is transferred into a large pool, along with everyone else's, and it is from this pool that money is lent out to generate income by manner of interest. If you compose out a check or do a withdrawal, the amount taken is deducted from the balance of your account standing with your bank. If you go forth your finances there and allow the bank to impart them out, then the interest part that belongs to you is credited to your account by your bank.

Banks, in fact, make money by making loans to other parties. The amount of money banks are able to impart is controlled by the Federal Soldier Modesty Bank. This control takes the word form of requiring the banks to throw a percentage of their finances in modesty and to impart out lone the balance.

How do Banks Make Money?
Banks make money by lending your money out at interest and by charging you for services provided. When they impart your money they have got to balance their aims of creating as much income as possible for themselves, with their duty to play it safe and keep security for that money. They also have got got to keep a good liquidness place in lawsuit you and all other clients desire to pull cash out.

Liquidity and profitableness are sometimes opposite places - one cannot generally have both at once. If you are able to impart your money for long time periods then a batch of interest can be earned. However the bank cannot impart so much of that money out that they forestall their clients from having access to their cash when they desire it.

Banks therefore run the operation like a businesses because, in fact, that's what they are - a business. Your business's merchandise may be a piece of equipment or machinery or clothes or food. The bank's merchandise is cash, or money. They sell this money in the word form of loans and other financial type products. They do their money on the interest and fees they charge on these loans and they pay others for that money. These others are their customers.

The cardinal is, banks must get more than interest income coming in from loans given out, than the cost of interest they pay have got to pay out (to clients for allowing their finances to be deposited with them).

The other large gross points generated by banks are the fees they charge. The old years where only a small part of the bank's income came from fees charged have long gone.

Today, bank fees do up a significant majority of the bank's earnings and they charge for every service, whether it is for an electronic transaction, or honouring a backdown from an standard atmosphere machine, or permitting a transfer through the Internet banking system. Bank's fees add up to multi billions worth of income for the bank but are a changeless beginning of exasperation and irritation to customers.

Another large beginning of income for the bank is tax returns from investing and securities. Here the banks take some of the finances they throw and purchase other products, such as a shares or equity in businesses. This in bend generates profits, which is received by the bank by manner of dividends etc.ank short letters will soon go obsolete. When this happens, the change in the nature of money will have got a important consequence on our society.

The Value of Stocks of a Company

The argument rages all over Eastern and Central Europe, in states in transition as well as in Horse Opera Europe. It raged in United Kingdom during the 80s: Is privatization really the robbery in disguise of state assets by a choice few, buddies of the political regime? Margaret Margaret Thatcher was impeach of it - and so was the Agency of Transformation in the Democracy of Macedonia. At what terms should the companies owned by the State have got been sold? This inquiry is not as simple and consecutive forward as it sounds.

There is a mammoth stock pricing chemical mechanism known as the Stock Exchange. Willing buyers and willing Sellers ran into there to freely negociate deals of stock purchases and sale. Every twenty-four hours new information, macro-economic and micro-economic, determines the value of companies.

Greenspan testifies, the economical figs are too good to be true and the rumor factory starts working: interest rates might travel up. The stock market responds with a craze - it crashes. Why?

A top executive director is asked how profitable volition his firm be this quarter. He winks, he smiles - this is interpreted by Wall Street to intend that they WILL travel up. The share travels up frantically: no 1 desires to sell it, everyone desire to purchase it. The result: a crisp rise in the price. Why?

Moreover: the terms of the stock terms of companies A with an indistinguishable size, similar financial ratios (and in the same industry) barely budges. Why didn't it expose the same behaviour?

We state that the pillory of the two companies have got different elasticity (their terms move up and down differently), probably the consequence of different sensitivenesses to changes in interest rates and in earnings estimates. But this is just to rename the problem. The inquiry remains: why? Why make the shares of similar companies respond differently?

Economy is a subdivision of psychological science and wherever and whenever world are involved, replies don't come up easy. A few theoretical accounts have got been developed and are in broad usage but it is hard to state that any of them have existent prognostic or even explanatory value. Some of these theoretical accounts are "technical" in nature: they disregard the basics of the company. Such theoretical accounts presume that all the relevant information is already incorporated in the terms of the stock and that changes in expectations, hopes, fearfulnesses and attitudes will be reflected in the terms immediately. Others are fundamental: these theoretical accounts trust on the company's public presentation and assets. The former theoretical accounts are applicable mostly to companies whose shares are traded publicly, in stock exchanges. They are not very utile in trying to attach a value to the stock of a private firm. The latter type (fundamental) theoretical accounts can be applied more than broadly.

The value of a stock (a bond, a firm, existent estate, or any asset) is the sum of money of the income (cash flow) that a sensible investor would anticipate to get in the future, discounted at the appropriate price reduction (usually, interest) rates. The discounting reflects the fact that money received in the hereafter have lower (discounted) buying powerfulness than money received now. Moreover, we can put money received now and get interest on it (which should normally equal the discount). Put differently: the price reduction reflects the loss in buying powerfulness of money not received at present or the interest that we lose by not being able to put the money currently (because we will have it only in the future). This is the clip value of money. Another problem is the uncertainness of future payments, or the hazard that we will not have them. The longer the period, the higher the risk, of course. A theoretical account bes which associates the time, the value of the stock, the cash flows expected in the hereafter and the price reduction (interest) rates.

We said that the rate that we utilize to price reduction hereafter cash flows is the predominant interest rate and this is partly true in stable, predictable and certain economies. But the price reduction rate depends on the rising prices rate in the country where the firm is (or in all the states where it operates in lawsuit it is a multinational), on the proposed supply of the shares and demand for it and on the aforesaid hazard of non-payment. In certain places, further factors must be taken into consideration (for example: country hazard or foreign exchange risks).

The supply of a stock and, to a lesser extent, the demand for it determine its statistical distribution (how many stockholders are there) and, as a result, its liquidity. Liquid intends how freely can one bargain and sell it and at which measures sought or sold make terms go rigid. Example: if a batch of shares is sold that gives the buyer the control of a company - the buyer will normally pay a "control premium". Another example: in thin markets it is easier to pull strings the terms of a stock by artificially increasing the demand or decreasing the supply ("cornering" the market).

In a liquid market (no problems to purchase and to sell), the price reduction rate is made up of two elements: one is the risk-free rate (normally, the interest collectible on authorities bonds), the other beingness the hazard related rate (the rate which reflects the hazard related to the specific stock).

But: what is this hazard rate?

The most widely used theoretical account to measure specific hazards is the Capital Asset Pricing Model (CAPM).

According to it, the price reduction rate is the risk-free rate plus a coefficient (called beta) multiplied by a hazard insurance premium general to all pillory (in the USA it was calculated to be 5.5%). Beta is a measurement of the volatility of the tax tax return of the stock relation to that of the return of the market. A stock's Beta can be obtained by calculating the coefficient of the arrested development line between the weekly tax returns of the stock and those of the stock market during a selected clip time period of time.

Unfortunately, different betas can be calculated by selecting different parametric quantities (for instance, the length of the period on which the computation is performed). Another problem is that betas change with every new datum. Professionals vacation spot to sensitiveness diagnostic tests which neutralize the changes that betas experience with time.

Still, with all its defects and moot assumptions, the CAPM should be used to determine the price reduction rate. But to utilize the price reduction rate we must have got what to discount, future cash flows.

The lone relatively certain cash flows are the dividends paid to the shareholders. So, Dividend Discount Models (DDM) were developed.

Other theoretical accounts associate to the proposed growing of the company (which is supposed to increase the collectible dividends and to cause the stock to appreciate in value).

Still, DDM require, as input, the ultimate value of the stock and growing theoretical accounts are only suitable for mature firms with a stable and not too high dividend growth. Two-stage exemplaries are more than powerful because they compound both emphases: on dividends and on growth. This is because of the life-cycle of firms: at first, they be given to have got a high and unstable dividend growing rate (the DDM undertakes this adequately). As the firm matures, it is expected to have got a lower and stable growing rate, suitable for the treatment of Growth Models.

But how many old age of future income (from dividends) should we utilize in a our calculations? If a firm is profitable now, is there any warrant that it will go on to be so in the adjacent year, the adjacent decade? If it makes go on to be profitable - who can vouch that its dividend policy will not change and that the same rate of dividends will go on to be distributed?

The number of time periods (normally, years) selected for the computation is called the "price to earnings (P/E) multiple". The multiple denotes by how much we multiply the (after tax) earnings of the firm to obtain its value. It depends on the industry (growth or dying), the country (stable or geopolitically perilous), on the ownership construction (family or public), on the management in topographic point (committed or mobile), on the merchandise (new or old technology) and a countless of other factors. It is almost impossible to objectively quantify or explicate this procedure of analysis and determination making. In telecommunications, the range of numbers used for valuing pillory oa private firm is between 7 and 10, for instance. If the company is in the public domain, the number can hit up to 20 modern times the nett earnings.

While some companies pay dividends (some even borrow to make so), others just make not pay. So in stock valuation, dividends are not the lone hereafter incomes you anticipate to get. Capital additions (profits which are the consequence of the grasp in the value of the stock) also count. This is the consequence of outlooks regarding the firm's free cash flow, in peculiar the free cash flow that travels to the shareholders.

There is no understanding as to what represents free cash flow. In general, it is the cash which a firm have after sufficiently investing in its development, research and (predetermined) growth. Cash Flow Statements have got go a criterion accounting demand in the 80s (starting with the USA). Because "free" cash flow can be easily extracted from these reports, stock evaluation based on free cash flow became increasingly popular and feasible. It is considered independent of the idiosyncratic parametric quantities of different international environments and therefore applicable to multinationals or to national firms which export.

The free cash flow of a firm that is debt-financed solely by its shareholders belongs solely to them. Free cash flow to equity (FCFE) is:

FCFE = Operating Cash Flow subtraction Cash needed for meeting growing targets

Where

Operating Cash Flow = Net Income (NI) PLUS Depreciation and Amortization

Cash needed for meeting growing targets = Capital Expenditures + Change in Working Capital

Working Capital = Entire Current Assets - Entire Current Liabilities

Change in Working Capital = One Year's Working Capital subtraction Former Year's Working Capital

The complete expression is:

FCFE = Net Income PLUS

Depreciation and Amortization MINUS

Capital Expenditures PLUS

Change in Working Capital.

A leveraged firm that borrowed money from other beginnings (could also be preferable stockholders) have a different free cash flow to equity. Its CFCE must be adjusted to reflect the preferable dividends and principal repayments of debt (MINUS sign) and the return from new debt and preferable pillory (PLUS sign). If its borrowings are sufficient to pay the dividends to the holders of penchant shares and to service its debt - its debt to capital ratio is sound.

The FCFE of a leveraged firm is:

FCFE = Net Income PLUS

Depreciation and Amortization MINUS

Principal Repayment of Debt MINUS

Preferred Dividends PLUS

Proceeds from New Debt and Preferred MINUS

Capital Expenditures MINUS

Changes in Working Capital.

A sound debt ratio means:

FCFE = Net Income MINUS

(1 - Debt Ratio)*(Capital Expenditures MINUS

Depreciation and Amortization PLUS

Change in Working Capital).