Faye Kennant Case Scenario
Faye Kennant, an equity analyst, is preparing a research report on Svensoft Oyj, which sells application software to large financial services firms and is based in Helsinki, Finland. Kennant plans to conduct an industry analysis, consider several valuation alternatives, and select an appropriate valuation tool for stock selection. Her first step is to consider whether Svensoft is in an attractive industry and to gauge whether Svensoft has a strong position within the industry. She prepares the following industry analysis: ? Industry structure and rivalry: The application software industry is dominated by two companies: Waldoware and Meteor. The founders of Waldoware and Meteor are long- term rivals and the two firms compete brutally for every customer. Svensoft has historically avoided competition with the two by focusing on the needs of large financial services providers and segmenting its offerings. Waldoware recently acquired a small financial services software firm and has committed significant resources to it for competing more effectively. Meteor, on the other hand, has developed its own offering, which many customers consider superior to Svensoft’s offering.
? Threat of new entry: The dominant positions enjoyed by existing players have resulted in significant barriers to entry into the software industry which in turn enabled the existing players to maintain high profitability. Prominent features of barriers to entry in this industry are: low customer switching costs, high supply-side economies of scale, incumbency advantages, and high capital requirements.
? Threat of substitutes: substitute products are not currently available.
? Customer power: Since most financial services firms already have some sort of application software, the recent increase in available offerings is allowing them to negotiate much better deals for renewals or new licenses.
? Supplier power: Labor is the primary input to application software. The increased rivalry has created a high demand for programmers and elevated salaries, particularly for experienced programmers.
? Demand: Application software has largely penetrated its target customer base and industry revenue growth has slowed. However, the growth of unit sales in this industry has been closely tracking the overall economic growth.
? Supply: There are few limitations to the quantity of application software that can be provided.
Svensoft has decided to respond to these pressures by further focusing on the reliability of its applications. Financial services customers have cited reliability as their key consideration in purchase decisions. Svensoft currently lags Waldoware in this regard but intends to become the most reliable.
Given the consolidation that has already taken place in the industry, Kennant believes Svensoft could be acquired. She considers several potential valuation models to determine Svensoft’s potential takeover value. Further, in regard to the process of valuing stocks, Kennant believes the following:
1. Apply appropriate valuation models well grounded in traditional intrinsic value and discounting concepts; the most important factor in determining a security’s intrinsic value is a forecast of “earning power” and it should be determined independent of market price.
2. As Graham and Dodd stipulated, growth stocks should be purchased at bargain prices, whereas cyclical stocks should be purchased at prices within a range of their intrinsic value.
31. According to Kennant’s industry analysis, which of the following is the least attractive competitive force for the software industry?
A. Customer power.
B. Threat of new entry.
C. Threat of substitutes.
Answer: A
“The Five Competitive Forces That Shape Strategy,” Michael E. Porter
2009 Modular Level II, Volume 4, pp. 202-210 Study Session 11-38-a, b
Distinguish among the five competitive forces that drive industry profitability in the medium and long run. Illustrate how the competitive forces drive industry profitability.
According to Kennant’s analysis, most financial services firms already have some sort of application software and the recent increase in available offerings is allowing them to negotiate much better deals for renewals or new licenses. Thus, customer power is not an attractive force for the software industry.
32. In regard to the prominent threat of new entry factors that Kennant has included in her industry analysis, she is least accurate with respect to:
A. incumbency advantages.
B. customer switching costs.
C. supply-side economies of scale.
Answer: B
“The Five Competitive Forces That Shape Strategy,” Michael E. Porter
2009 Modular Level II, Volume 4, pp. 202-204 Study Session 11-38-a, b
Distinguish among the five competitive forces that drive industry profitability in the medium and long run. Illustrate how the competitive forces drive industry profitability.
High switching costs of customers, not low switching costs, reduces the threat of new entry into the industry.
33. The industry analysis model for Svensoft pays least attention to:
A. demand.
B. profitability.
C. external factors.
Answer: C
“Industry Analysis,” Jeffrey C. Hooke 2009 Modular Level II, Volume 4, pp. 225-226 Study Session 11-39-a Discuss the key components that should be included in an industry analysis model.
Kennant did not discuss external factors such as technology, government, social changes, demographics and foreign influences in her industry analysis for the software industry.
34. Which life cycle phase best describes the application software industry?
A. Mature.
B. Growth.
C. Declining.
Answer: A
“Industry Analysis,” Jeffrey C. Hooke 2009 Modular Level II, Volume 4, pp. 226-228 Study Session 11-39-b, c Illustrate the life cycle of a typical industry.
Analyze the effects of business cycles on industry classification (i.e., growth, defensive, cyclical).
The following characteristics of the application software industry are typical of an industry in mature phase: industry trend line corresponds to the overall economy; participants compete for share in a stable industry; gain market share by offering improved quality or service; and grow by acquisitions.
35. Which of the following is the least attractive factor with regard to the pricing power in the applications software industry?
A. Key supply inputs.
B. Product segmentation.
C. Industry concentration.
Answer: A
“Industry Analysis,” Jeffrey C. Hooke 2009 Modular Level II, Volume 4, pp. 246-247 Study Session 11-39-f Explain factors that affect industry pricing practices.
As described in the vignette labor is the primary input to application software. Since the increased rivalry has created a high demand for programmers and elevated salaries, particularly for experienced programmers, the key supply inputs is the least attractive factor of the applications software industry.
36. Kennant’s beliefs are most accurate with respect to her belief:
A. 1 but not 2.
B. 2 but not 1.
C. both 1 and 2.
Answer: A
“A Note on Asset Valuation,” George H. Troughton, CFA 2009 Modular Level II, Volume 4, pp. 5-7 Study Session 10-33
The candidate should be able to explain how the classic works on asset valuation by Graham and Dodd and John Burr Williams are reflected in modern techniques of equity valuation.
Kennant believes the most important factor in determining a security’s intrinsic value is a forecast of “earning power” and it should be determined independent of market price which is consistent with Graham and Dodd (p. 6). The work by John Burr Williams proposes estimating the intrinsic value of common stock by calculating the present value of all future dividends per share (p. 7). Thus, her belief #1 is correct. However, she is incorrect in her belief #2. According to Graham and Dodd growth stocks should be purchased at prices within a range of their intrinsic value whereas cyclical stocks should be purchased at bargain prices (p. 6). | 
发表于 2009-7-1 15:05
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