How Can Relative Strength Analysis Be Helpful in a Top-Down

question 40

Essay

How can relative strength analysis be helpful in a top-down approach to security analysis?

Identify considerations in project selection and the impact of financing decisions on such selections.

Understand how flotation costs affect project evaluation and financing.

Recognize the role and calculation of the cost of debt in a firm's capital structure.

Understand the subjective approach to adjusting the cost of capital based on project risk.

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Definitions:

Price-Earnings Ratio

is a measure of a company's current share price relative to its per-share earnings, used to evaluate if a stock is undervalued or overvalued.

Times Interest Earned

A financial ratio that measures a company's ability to meet its interest payments on outstanding debt, calculated by dividing earnings before interest and taxes (EBIT) by the interest expense.

Debt-To-Equity Ratio

A gauge for understanding the proportionate use of debt and equity by shareholders in the funding mechanisms for a company's assets.

Equity Multiplier

A metric indicating the proportion of a firm's assets funded by owner's equity.