Equity Investments【Reading 51】Sample provides, framework, understand, 2012

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Industry analysis is most likely to provide an analyst with insight about a company’s:

A) competitive strategy.

B) pricing power.

C) financial performance.

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Industry analysis provides a framework for an analyst to understand a firm in relation to its competitive environment, which determines how much pricing power a firm has. Competitive strategy and financial performance are aspects of company analysis.

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Commercial industry classification systems such as the Global Industry Classification Standard (GICS) typically classify firms according to their:

A) correlations of historical returns.

B) sensitivity to business cycles.

C) principal business activities.

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Commercial providers of industry classification systems such as the GICS classify firms according to principal business activity, such as Consumer Staples, Financial Services, or Health Care.

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Auto manufacturers and home builders would most likely be grouped together in an industry classification system based on:

A) type of business activity.

B) sensitivity to business cycles.

C) dividend yields.

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Auto manufacturing and home building are both cyclical industries. An industry classification system based on business cycle sensitivity would be the most likely to group firms from these industries together.

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Which of the following industries is most likely to be classified as non-cyclical?

A) Autos.

B) Utilities.

C) Housing.

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Non-cyclical industries are those for which demand is not highly sensitive to business cycles, such as utilities, health care, and food and beverages. Housing and autos are examples of cyclical industries.

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A firm’s earnings are most likely to be cyclical if:

A) the firm produces luxury items.

B) most of the firm’s costs depend on its level of output.

C) the firm operates in a growth industry.

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Producers of luxury items tend to have cyclical earnings because consumers typically decrease their purchases of these items during economic recessions. The earnings of firms with high percentages of variable costs are not as likely to be cyclical as those of firms with high percentages of fixed costs (i.e., high operating leverage). A growth industry has demand that is strong enough that earnings remain relatively unaffected by the business cycle.

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When constructing a peer group of firms, an analyst should least appropriately consider the firms’:

A) industry classification.

B) business cycle sensitivity.

C) cost structures.

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A peer group should consist of firms that are alike in their principal lines of business, along with other similarities such as cost structures and access to capital. Firms can be similar in business cycle sensitivity but dissimilar in terms of their business activities (e.g., a firm in the home building industry and a firm in the heavy equipment manufacturing industry).

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For relative valuation, a peer group is best described as companies:

A) in a similar sector or industry classification.

B) at a similar stage of the industry life cycle.

C) with similar business activities and competitive factors.

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An analyst should form peer groups of companies that have similar business activities, drivers of demand and costs, and access to capital. Companies in the same industry or sector and companies at the same stage of the industry life cycle are not necessarily comparable for equity valuation purposes.

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A manager tells a research analyst, “A thorough industry analysis should use more than one approach to estimate industry variables,” and “An analyst should not compare his valuations to those of other analysts.” Which of these two statements is (are) CORRECT?

A) Only one of these statements is accurate.

B) Both of these statements are accurate.

C) Neither of these statements is accurate.

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The first statement is accurate. When analyzing an industry, an analyst should use different approaches and scenarios when estimating industry variables. The second statement is inaccurate. Comparing one’s own forecasts with those of other analysts can be useful for confirming the soundness of the analysis and for identifying industries that are potentially overvalued or undervalued by the consensus view.

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The industry experience curve illustrates the relationship between:

A) company age and profitability.

B) productivity and average years of employment.

C) cumulative output and cost per unit.

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The industry experience curve shows cost per unit relative to cumulative output. Cost per unit typically decreases over time due to higher utilization rates for fixed capital, improvements in the efficiency of labor, and better product design and manufacturing methods.

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Changes in population size and average age that affect industry growth and profitability are best described as:

A) macroeconomic influences.

B) social influences.

C) demographic influences.

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Among the external influences that affect industries, “demographic factors” refers to those that are related to the size and composition of the population.