1. ©2015, College for Financial Planning, all rights reserved. Session 11 Fundamental & Technical Analysis, Ratios, Anomalies CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Investment Planning

2. Session Details Module5 Chapter(s)2 LOs5-3 Explain terminology and concepts associated with fundamental and technical analysis. 5-4 Relate fundamental and technical analysis concepts to modern portfolio theory principles. 5-6 Relate the impact of financial leverage to the financial performance of a company and to the valuation of a company’s stock. 11-2

3. Top-Down Analysis Economic analysis GDP growth Monetary & fiscal policy Political analysis Inflation analysis Industry analysis Company analysis 11-3

4. Industry Analysis The growth and maturation of an industry Output Time t o t 1 t 2 t 3 Rapid Growth Declining Growth Maturity 11-4

5. Bottom-Up Analysis Ratio analysis Liquidity (current and quick ratios) Activity (inventory turnover) Profitability (EBITDA) Return on capital Leverage Cash flow analysis Business analysis 11-5

6. Liquidity Ratios Current ratio Quick ratio (acid test) 11-6

7. Ratio Comparisons Ratios of a firm over time, such as ROE over the past 5 and 10 years Ratios of firms within an industry tend to have similar numerical values differences in numerical values are reasons for further analysis 11-7

8. Problems for Interpretation Different definitions for the same ratio Historical data may be outmoded Accounting changes alter financial statements Non-recurring items 11-8

9. Financial Leverage & the Return on Equity The use of debt financing (financial leverage) o may increase the return on equity o also increases financial risk Increased risk may offset the increased return on equity 11-9

10. Impact of Equity vs. Debt Two companies, each raises $100M, one all equity, the other $50M equity and $50M debt. What is the impact of $10M in earnings on ROE? Company A: 10/100 = 10% ROE Company B: 10/50 = 20% ROE Example ignores interest charges and cost of borrowing Company ACompany B Equity - Common Stock$100M$50M Debt - Corporate Bond$0$50M Total Capitalization$100M 11-10

11. Technical Analysis Focus on the stock, not on the company Interprets supply and demand for the stock Uses graphs of stock’s price movements and volume 11-11

12. Moving Averages Compare the stock's current price to a moving average of the stock's price Moving averages may be varying amounts, such as 50, 100, or 200 days The moving average follows the current price 11-12

13. Moving Averages Buy Signal Sell Signals Buy Signal Buy Signals Sell Signal Buy Signal Sell Signal 11-13

14. Technical Trading Indicators Advance/decline line Moving averages Support and resistance levels Mutual fund cash positions Short sales by specialists Short interest Odd lot purchases Investment advisory opinions Put/call ratio Barron’s Confidence Index 11-14

15. The Dow Theory Emphasizes movements in the industrial and transportation averages Movement in one average, confirmed by movement in the other average, indicates a trend 11-15

16. Dividend Growth Rate Where: g = dividend growth rate ROE = return on equity RR = earnings retention rate 11-16

17. Constant Growth DDM 11-17

18. Growth Rate Example Zarathustra Industries has assets of $300 million, and liabilities of $100 million. Zarathustra earned $25 million last year, and paid out $5 million in dividends. What is Zarathustra’s dividend growth rate? $300M (assets) - $100M (liabilities) = $200M of equity $25M/$200M =.125 = 12.5% ROE $25M (earnings) – $5M (dividends) = $20M in retained dividends $20M/$25M =.80 Retention Rate (RR) g = ROE x RR 12.5 x.80 = 10% 11-18

19. Question 1 Your client has a mutual fund that had a 15% return last year, with a beta of.90. The risk- adjusted return of the fund is a.13.50%. b.15.00%. c.16.67%. d.17.25%. 11-19

20. Question 2 Fundamental analysis includes which of the following? I.computation of the current ratio II.comparison of a company’s PEG ratio to its industry’s PEG ratio III.computation of the company’s debt-to-equity ratio IV.comparison of a company’s daily trading volume to its historical volume a.I and II only b.I and III only c.I, II, and III only d.I, III, and IV only e.I, II, III, and IV 11-20

21. Question 3 In designing and implementing an investment plan for a client, a planner who believes in the strong form of the efficient market hypothesis will use which one of the following combinations of analytical techniques? a.moving average analysis, industry analysis, and weighted average returns b.efficient frontier, correlation coefficients, and weighted average returns c.efficient frontier, industry analysis, and company analysis d.technical analysis, fundamental analysis, and correlation coefficients 11-21

22. Question 4 If a company payout ratio over the past five years has gradually declined from 50% to 25%, which one of the following statements summarizes the impact on the dividend growth model? a.The payout ratio has no impact on the dividend growth model. b.The required return (“r”) in the dividend growth equation will rise. c.The “g” in the dividend growth model may be difficult to determine. d.The current dollar dividend amount will be affected, but neither “r” nor “g” will be affected. 11-22

23. Question 5 Kaleidoscope Inc. has assets of $600 million and liabilities of $350 million. Earnings for the current year were $50 million, and the dividend payout ratio is 25%. What is the dividend growth for Kaleidoscope Inc.? a.10% b.15% c.20% d.25% 11-23

24. ©2015, College for Financial Planning, all rights reserved. Session 11 End of Slides CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Investment Planning