Fundamental analysis uses information in a firms financial statements and other sources of public

information to assess a firms expected future performance, and hence its likely value. Firms with

estimated values greater than their current prices are then recommended as buys and those with values

lower than the current price as sells.

Intergalactic Software Company went public three months ago. You are a sophisticated investor who

devotes time to fundamental analysis as a way of identifying mispriced stocks. Which of the following

characteristics would you focus on in deciding whether to follow this stock?

Market capitalization (will influence the extent of interest of institutional interests)

The average number of shares traded per day

The bid-ask spread for the stock

Whether the underwriter that brought the firm public is a top tier investment banking firm

Whether the firms audit company is a Big Four firm

Whether there are analysts from major brokerage firms following the company

Whether the stock is held mostly by retail or by institutional investors

Include in your response: What is a sophisticated investor and a comprehensive description of what is

included in a fundamental analysis of a company.