Financial Analysis & Derivatives Flashcards
6 cards from real IMC practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Financial Analysis & Derivatives flashcards as text
What is the 'Gordon Growth Model' used for in equity valuation?
Answer: Valuing a share as the present value of dividends growing at a constant rate: P = D1/(r-g)
The Gordon Growth Model (a simplified DDM) values a share as: Price = Next Year's Dividend (D1) / (Required Return (r) - Dividend Growth Rate (g)). It is most applicable to stable, mature companies that pay regular growing dividends.
What is 'fundamental analysis' in investment management?
Answer: Analysis of a company's financial statements, competitive position, management, and economic environment to determine intrinsic value
Fundamental analysis evaluates a security's intrinsic value by examining financial statements (earnings, cash flows, balance sheet), competitive position, management quality, industry dynamics, and macroeconomic factors. The aim is to identify undervalued or overvalued securities.
What is 'technical analysis' and what does it assume?
Answer: Analysis of historical price and volume patterns to forecast future price movements, assuming all relevant information is already reflected in market prices
Technical analysis studies historical price charts and trading volumes to identify patterns and trends, assuming past price behaviour tends to repeat and that market psychology is reflected in price patterns. It is contrasted with fundamental analysis, which focuses on intrinsic value.
What is 'interest coverage ratio' and what does a low ratio indicate?
Answer: Operating profit (EBIT) divided by interest expense, measuring the company's ability to service its debt; a low ratio indicates difficulty covering interest payments
Interest coverage ratio = EBIT / Interest Expense. It shows how many times a company can cover its interest payments from operating profit. A ratio below 1.5x is generally considered concerning, suggesting difficulty servicing debt, particularly in a downturn.
What is 'goodwill' on a balance sheet?
Answer: The premium paid above the fair value of identifiable net assets when acquiring a company, representing brand value, customer relationships, and synergies
Goodwill arises in acquisitions when the purchase price exceeds the fair value of the acquired company's identifiable net assets. It represents intangible value such as brand, workforce, customer relationships, and synergies. Goodwill is subject to annual impairment testing.
What is 'EV/EBITDA' multiple and what is it used for?
Answer: Enterprise Value divided by EBITDA — a valuation multiple used to compare companies across different capital structures and assess relative value
EV/EBITDA compares a company's total value (equity + net debt) to its operating cash generation (EBITDA). Because it uses EV rather than market cap, it neutralises differences in capital structure, making it more appropriate for cross-company comparison than P/E, particularly in M&A analysis.