LOS b: Demonstrate the various steps involved in global industry analysis, including country analysis.

Q1. Which combination of business cycle stage and related attractive investment is least appropriate?

           Stage of the business cycle      Investment

A)      Recovery                            Interest-sensitive stocks

B)     Economy slows                  Bonds

C)     Late upswing                       Bonds

Q2. Which description of analysts’ attempts to forecast economic growth is most accurate?

A)   Expected real economic growth is the most important variable to analyze in a country because it is the one that can be predicted most accurately.

B)   Analysts who can identify the various stages of the business cycle better than others have the opportunity to earn excess risk-adjusted returns.

C)   Long-run forecasts focus on predicting turning points in the business cycle.

Q3. Which combination of business cycle stage and related attractive investment is least appropriate?

          Stage of the business cycle         Investment

A)       Recovery                               Commodities

B)     Economy slows                      Interest-sensitive stocks

C)    Late cycle recession                Bonds

Q4. Steven Adams, assistant investment director for the U.S.-based Orange Group, is charged with selecting investments in a number of foreign countries. At the moment, he is buying interest-sensitive stocks in Jackland and commodities in Jundland. Jackland and Jundland are most likely in what stages stage of the business cycle?

                  Jackland                           Jundland

A)    early upswing                   recession

B)    late upswing                     early upswing

C)   slowing economy              recovery

Q5. While having lunch with a group of friends, Francine Lenser, CFA, was overheard saying the following: “The recent boom in technological advances should keep the economy growing. Whenever the economy slows, someone will come along with a bold new idea that kick-starts it.”

Lenser’s statement most accurately reflects the:

A)   exogenous growth theory.

B)   new growth theory.

C)   neoclassical growth theory.

Q6. The Hartfactor Corporation is a producer of specialized medical devices, and has historically earned excess returns on a risk-adjusted basis. Which of the following is least likely to be characteristic of Hartfactor Corp. and its industry?

A)   A large number of suppliers.

B)   A Herfindahl index of 0.05.

C)   High cooperation.

Q7. Ginormous Technologies, Ltd. has a return on equity (ROE) of 14% and a required rate of return of 9%. Which statement is least likely to be characteristic of Ginormous and its industry?

A)   It is a full flow-through firm.

B)   It has a positive franchise factor.

C)   The Herfindahl index is 0.02.

Q8. Which statement about industry risk is least accurate?

A)   Vertical integration may mitigate some risk of value chain competition.

B)   Higher product standardization increases investment risk.

C)   As the number of suppliers increases, the value of the producer decreases.

Q9. The plastic shoe industry is comprised of six firms. Two have 30% market share each and the other four each have 10% market share. Which description of the Herfindahl index and market concentration in the plastic shoe industry is most accurate?

          Herfindahl index         Market concentration

A)      0.17                                  Moderate

B)      0.22                                  Moderate

C)      0.22                                 High

Q10. Which of the following is most important to country analysis?

A)   Competitive advantage.

B)   Value chain.

C)   Expected GDP in the home country.

Q11. Which combination of type of analysis and related approach is the least appropriate?

          Type of analysis                          Approach

A)   Country analysis                  GDP forecast

B)   Industry analysis                  Value chain analysis

C)   Country analysis                  Herfindahl index

Q12. Which statement best applies to the relationship between country and industry analysis?

A)   Global demand analysis is a key component of country analysis.

B)   Co-opetition can become problematic in country analysis during periods of strong economic growth.

C)   Economic growth in the home country can have less impact on a multinational firm than global industry conditions.

Q13. Jessica Riendeau follows both Globalanacing Ltd. and Lowprofitious Corp. She has determined that Globalancing consistently has a higher valuation than Lowprofitious. Which of the following is least likely to be characteristic of the relationship between Globalancing and Lowprofitious and their respective home countries and industries?  

          Globalancing                                Lowprofitious

A) No vertical integration             Vertically integrated

B) Full flow-through firm             Passes along 70% of its country's inflation

C) Low inflation rate country       High inflation rate country

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Q1. Which combination of business cycle stage and related attractive investment is least appropriate?

           Stage of the business cycle      Investment

A)      Recovery                            Interest-sensitive stocks

B)     Economy slows                  Bonds

C)     Late upswing                       Bonds

Correct answer is

In a recovery, appropriate investments would be stocks and commodities, in response to the economic upswing. Interest-sensitive investments would not be appropriate since interest rates would likely rise as the economy picks up.

Q2. Which description of analysts’ attempts to forecast economic growth is most accurate?

A)   Expected real economic growth is the most important variable to analyze in a country because it is the one that can be predicted most accurately.

B)   Analysts who can identify the various stages of the business cycle better than others have the opportunity to earn excess risk-adjusted returns.

C)   Long-run forecasts focus on predicting turning points in the business cycle.

Correct answer is B)

Long-run forecasts focus on predicting long-run growth. Short-run forecasts focus on the business cycle, even though they are difficult to make with any degree of success. Economic growth is the most important variable to analyze because it has the most impact on risk and return, even though it is difficult to forecast.

Q3. Which combination of business cycle stage and related attractive investment is least appropriate?

          Stage of the business cycle         Investment

A)       Recovery                               Commodities

B)     Economy slows                      Interest-sensitive stocks

C)    Late cycle recession                Bonds

Correct answer is C)

Late in a recession, appropriate investments would be stocks and commodities, in preparation for the economic upswing. Bonds would not be appropriate since interest rates would likely rise as the economy picks up.

Q4. Steven Adams, assistant investment director for the U.S.-based Orange Group, is charged with selecting investments in a number of foreign countries. At the moment, he is buying interest-sensitive stocks in Jackland and commodities in Jundland. Jackland and Jundland are most likely in what stages stage of the business cycle?

                  Jackland                           Jundland

A)    early upswing                   recession

B)    late upswing                     early upswing

C)   slowing economy              recovery

Correct answer is C)

Interest-sensitive stocks are most attractive during the late upswing and the period in which the economy slows. Jackland is most likely in one of those two stages. Commodities are most appealing during the recession and recovery cycles. The only juxtaposition of those periods is the answer in which Jackland’s economy is slowing and Jundland’s economy is in recovery.

Q5. While having lunch with a group of friends, Francine Lenser, CFA, was overheard saying the following: “The recent boom in technological advances should keep the economy growing. Whenever the economy slows, someone will come along with a bold new idea that kick-starts it.”

Lenser’s statement most accurately reflects the:

A)   exogenous growth theory.

B)   new growth theory.

C)   neoclassical growth theory.

Correct answer is B)

Lenser’s statement is a decent layman’s description of the new growth theory, also known as the endogenous growth theory. This theory argues that economic growth can continue indefinitely as long as technological advances are made.

Q6. The Hartfactor Corporation is a producer of specialized medical devices, and has historically earned excess returns on a risk-adjusted basis. Which of the following is least likely to be characteristic of Hartfactor Corp. and its industry?

A)   A large number of suppliers.

B)   A Herfindahl index of 0.05.

C)   High cooperation.

Correct answer is B)

A Herfindahl index of 0.05 is considered a highly competitive industry, which is not likely to be characteristic of a company earning excess returns. A large number of suppliers means low supplier bargaining power and high industry cooperation, both of which increase producer returns.

Q7. Ginormous Technologies, Ltd. has a return on equity (ROE) of 14% and a required rate of return of 9%. Which statement is least likely to be characteristic of Ginormous and its industry?

A)   It is a full flow-through firm.

B)   It has a positive franchise factor.

C)   The Herfindahl index is 0.02.

Correct answer is C)

Ginormous is earning an excess return (its ROE is higher than its required rate of return), and thus it is unlikely to be in a highly competitive industry (a Herfindahl index of less than 0.1). A firm with ROE higher than the required rate of return has a positive franchise factor, thus the higher its earnings retention ratio, the higher its franchise P/E. The lower a firm’s inflation flow-through the lower the valuation, so full flow-through would likely be characteristic of a firm earning excess returns.

Q8. Which statement about industry risk is least accurate?

A)   Vertical integration may mitigate some risk of value chain competition.

B)   Higher product standardization increases investment risk.

C)   As the number of suppliers increases, the value of the producer decreases.

Correct answer is C)

As the number of suppliers increases, suppliers have less pricing power and thus less ability reduce return to the producer. The value of the producer increases, not decreases. Higher product standardization increases buyer power and thus investment risk. Vertical integration along the value chain may mitigate competition for a firm.

Q9. The plastic shoe industry is comprised of six firms. Two have 30% market share each and the other four each have 10% market share. Which description of the Herfindahl index and market concentration in the plastic shoe industry is most accurate?

          Herfindahl index         Market concentration

A)      0.17                                  Moderate

B)      0.22                                  Moderate

C)      0.22                                 High

Correct answer is C)

The Herfindahl index is: (0.10² × 4) + (0.30² × 2) = 0.22 This is higher than 0.18, the minimum threshold for high concentration.

Q10. Which of the following is most important to country analysis?

A)   Competitive advantage.

B)   Value chain.

C)   Expected GDP in the home country.

Correct answer is C)

Country analysis is analysis of economic growth in the home country. The value chain and competitive advantage are both parts of industry analysis. Competitive advantage is important in selecting where to produce a good or service as part of an industry analysis, but less important for analyzing economic growth in the home country as part of country analysis.

Q11. Which combination of type of analysis and related approach is the least appropriate?

          Type of analysis                          Approach

A)   Country analysis                  GDP forecast

B)   Industry analysis                  Value chain analysis

C)   Country analysis                  Herfindahl index

Correct answer is C)

The Herfindahl index is used in competitive analysis of an industry, not in country analysis. GDP is used in country analysis. Industry analysis uses both value chain and industry life cycle approaches.

Q12. Which statement best applies to the relationship between country and industry analysis?

A)   Global demand analysis is a key component of country analysis.

B)   Co-opetition can become problematic in country analysis during periods of strong economic growth.

C)   Economic growth in the home country can have less impact on a multinational firm than global industry conditions.

Correct answer is C)

Global demand analysis is part of industry, not country, analysis. Co-opetition becomes problematic in periods of weak, not strong, economic growth.

Q13. Jessica Riendeau follows both Globalanacing Ltd. and Lowprofitious Corp. She has determined that Globalancing consistently has a higher valuation than Lowprofitious. Which of the following is least likely to be characteristic of the relationship between Globalancing and Lowprofitious and their respective home countries and industries?  

          Globalancing                                Lowprofitious

A) No vertical integration             Vertically integrated

B) Full flow-through firm             Passes along 70% of its country's inflation

C) Low inflation rate country       High inflation rate country

Correct answer is A)

Vertical integration can mitigate some value chain risk, and is consequently associated with higher, not lower, valuation. A low inflation rate, full flow-through of inflation, and a positive franchise factor are all associated with higher valuation.