Paper 09: Equity Investments Analysis

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About Course

The Professional courses are administered at Foundation, Intermediate and Advanced Levels. Each level requires an average of one year, though candidates are advised to provide for an additional one year to meet requirements for internship/ practical experience.

A student must book for a minimum of three papers in a level in any order unless is exempted or has credits.

This course is aimed at persons who wish to qualify and work or practice as investment, securities and financial analysts, portfolio managers, investment bankers, fund managers, consultants on national and global financial markets and related areas.

Course Content

Overview

  • course outline
  • course outline
  • course outline
  • course outline

MAY – AUG 2024 CLASS RECORDINGS

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1. Overview of equity markets and structure
1.1 Structure of the equity market: Financial system and intermediaries; components of financial system, characteristics of well-functioning financial system and the role of financial system in the economy, financial intermediaries’ classifications, services offered, differences between financial intermediation and financial disintermediation, roles of financial intermediaries. 1.2 Primary and secondary markets for equity securities 1.3 Trading equity securities; Types of market orders 1.4 Types of equity securities; ordinary shares (features, types, advantages and limitations; preference shares (features, types, advantages and limitations), private versus public 1.5 Investing in foreign equity securities; factors to consider when making foreign equity investment, reasons for investing in foreign equity and challenges. 1.6 Risk and return characteristics of different types of equity securities 1.7 Market value and book value of equity securities importance 1.8 Comparison of a company’s cost of equity, accounting rate of return and investors’ required rate of return 1.9 Equity security and company value

2. Fundamental analysis
2.1 Components of fundamental analysis; economic analysis, industry analysis and company analysis

3. Overview of company analysis
3.1 Elements that should be covered in a thorough company analysis; forecasting of the following costs: cost of goods sold, selling general and administrative costs, financing costs, and income taxes 3.2 Comparing estimated values and market prices; information efficiency and efficient market hypothesis 3.3 Approaches to balance sheet modelling 3.4 Growth companies and growth stocks; defensive company and stocks; cyclical companies and stocks; speculative companies and stocks. 3.5 The elements of a competitive analysis for a company. 3.6 Contrast top-down and bottom-up approaches to economic forecasting. 3.7 The importance of quality of earnings analysis in financial forecasting and identify the sources of information for such analysis

4. Overview of industry analysis
4.1 The uses of industry analysis and the relation between industry analysis and company analysis 4.2 Methods by which companies can be grouped, current industry classification systems, and classification of companies given description of activities and the classification system 4.3 Factors that affect the sensitivity of a company to the business cycle and the uses besides limitations of industry and company descriptors such as “growth,” “defensive,” and “cyclical” 4.4 Company’s industry classification process to classify a potential “peer group” for equity valuation 4.5 Elements that need to be covered in a thorough industry analysis 4.6 Principles of strategic analysis of an industry; competitive forces that shape strategy; effect of competitive forces on prices and costs 4.7 Effects of barrier to entry, industry concentration, industry capacity, and market share stability on pricing power and return on capital 4.8 Product and industry life cycle models; Classification of industry as to life cycle phases (embryonic, growth, shakeout, maturity and decline); limitations of life- cycle concept in forecasting industry performance 4.9 Comparison of representative industries from various economic sectors 4.10 Macroeconomic, Demographic, governmental, social and technological influences on industry growth, profitability and risk

5. Market efficiency
5.1 The concept of market efficiency: definition and assumptions; importance of market efficiency to investment participants 5.2 Market value and intrinsic value 5.3 Factors affecting a market’s efficiency 5.4 Forms of market efficiency: weak form, semi-strong form and strong form; implications of each form of market efficiency for fundamental analysis, technical analysis and the choice between active and passive portfolio management 5.5 Random walk theory and efficient markets 5.6 Tests of market efficiency 5.7 Market pricing anomalies; Time series anomalies, Cross sectional anomalies, other anomalies and implications for investment strategies

6. Technical analysis
6.1 Overview of technical analysis: definition, assumptions, principles, differences between technical and fundamental analysis, advantages and disadvantages 6.2 Technical analysis tools – charts, trends, chart patterns, technical indicators, cycles 6.3 Dow theory: overview; assumptions; Using Dow Theory Concepts in Forex Trading, interpretation 6.4 Elliott wave theory: overview; principle of the theory, assumptions; interpretation 6.5 Trend analysis 6.6 Relationships between market efficiency and technical analysis; application of behavioural finance in technical analysis 6.7 Contrary opinion rules in relation to technical analysis 6.8 Forecasting methodology: conditional forecasting, economic forecasting 6.9 Market analysis

7. The equity valuation processes
7.1 Overview of equity valuation: Definition of value and the concept of alpha; the relationship between alpha and perceived mispricing; intrinsic value; contrast the going-concern concept of value to the concept of liquidation value 7.2 The steps in equity valuation process, and the objectives and tasks within each step 7.3 Valuation models in equity valuation; the importance of expectations in the use of valuation models, uses of valuation models; the use of valuation models within the context of traditional and modern concepts of market efficiency; absolute and relative valuation models 7.4 Alternative to traditional analysis techniques: cash flow returns on investment 7.5 The role of valuation in portfolio management 7.6 Contrast quantitative and qualitative factors in valuation 7.7 Covered under definition of value criteria for choosing an appropriate approach for valuing a particular company. 7.8 The role of ownership perspective in valuation 7.9 The contents and format of an effective research report 7.10 The responsibilities of analysts in performing valuations and communicating valuation results 7.11 Effects of inflation on the valuation process

8. Discounted dividend valuation
8.1 Streams of cash flow; compare of dividends, free cash flow, and residual income as inputs to discounted cash flow models and identify investment situations for which each measure is suitable. 8.2 The Dividend Discount Model: Calculate and interpret the value of shares using the dividend discount model (DDM) for single and multiple holding periods. 8.3 Valuation of shares using the Gordon growth model and the model’s underlying assumptions. 8.4 Gordon Growth Model: Computation and interpretation of implied growth rate of dividends using the Gordon growth model and current share price. 8.5 Calculation of the value of noncallable fixed-rate perpetual preferred shares. 8.6 The Present Value of Growth Opportunity: Calculation and interpretation of the present value of growth opportunities (PVGO) and the component of the leading price-to-earnings ratio (P/E) related to PVGO. 8.7 Calculation and interpretation of the justified leading and trailing P/Es using the Gordon growth model.

9. Valuation Multiples

10. Price multiples
10.1 Method of comparable and the method based on forecasted fundamentals as approaches to using price multiples in valuation 10.2 Alternative price multiples and dividend yield in valuation; fundamental factors that influence alternative price multiples and dividend yield 10.3 Normalised earnings per share (EPS) and its calculation 10.4 Measures of relative value: Price-to-earnings (P/E) ratio, Price-to-book (P/B) ratio, Price-to-cash flow ratio and Price-to-sales (P/S) ratio 10.5 Predicted P/E regression

11. Enterprise value multiples
11.1 Alternative definition of cash flow 11.2 Enterprise value multiples and its use in estimating equity value 11.3 Momentum indicators and their use in valuation 11.4 Sources of differences in cross boarder valuation comparisons

12. Residual income valuation
12.1 Residual income concept - economic value added (EVA), and market value added (MVA) concepts and their applications 12.2 Residual income valuation model- the uses of residual income models; calculation of intrinsic value of a common share using the residual income model and comparison of residual income to other present value models; 12.3 Fundamental determinants of residual income-; relationship between residual income valuation and the justified price-to-book ratio based on forecasted

13. Private company valuation
13.1 Private and public company valuation: similarities and contrasts - Reasons for performing private company valuations; uses of private business valuation and applications of greatest concern to financial analysts; 13.2 Definitions (standards) of value; definitions of value and how different definitions can lead to different estimates of value; 13.3 Valuation approaches, earnings normalization and cash flow estimation issues; the income, market, and asset-based approaches to private company valuation and factors relevant to the selection of each approach; cash flow estimation issues related to private companies and adjustments required to estimate normalized earnings; 13.4 Income approach methods of private company valuation; determination of the value of a private company using free cash flow, capitalized cash flow, and/or excess earnings methods; 13.5 Factors that require adjustment when estimating the discount rate for private companies; comparing various models used to estimate the required rate of return to private company equity (for example, the CAPM, the expanded CAPM, and the build-up approach);

14. Equity market equilibrium
14.1 Justification for the short term and long-term equilibrium 14.2 Grinold-Kroner model 14.3 Yardeni model 14.4 Tobins Q 14.5 Short term valuation methods 14.6 Stock market diversity and its measure (entropy)

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