Reading 36: Equity: Concepts and Techniques-LOS b 习题精选 between, concepts, industry, structure, 2010

土豆妮

Session 11: Equity Valuation: Industry and Company Analysis in a Global Context
Reading 36: Equity: Concepts and Techniques

LOS b: Distinguish between country analysis and industry analysis and compare and evaluate key concepts of industry analysis, such as demand analysis, industry life cycle analysis, and competition structure analysis, as well as risk elements inherent in industry analysis.

 

 

 

There are five firms in an industry. The market shares for firms one through five are 10%, 15%, 20%, 25%, and 30%, respectively. The Herfindahl index for the:

A) industry is low, suggesting intense competition.

B) industry is 0.225.

C) two largest firms in the industry is 0.152.

---

 

A Herfindahl index of more than 0.18 is an indication of low competition (concentrated industry players) in the industry. A Herfindahl index of less than 0.1 is an indication of intense competition in the industry.

土豆妮

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) High cooperation.

C) A Herfindahl index of 0.05.

---

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.

土豆妮

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) The Herfindahl index is 0.02.

B) It is a full flow-through firm.

C) It has a positive franchise factor.

---

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.

土豆妮

Which statement about industry risk is least accurate?

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

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

C) Higher product standardization increases investment risk.

---

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.

土豆妮

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 High

C) 0.22 Moderate

---

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

土豆妮

Which of the following is most important to country analysis?

A) Competitive advantage.

B) Expected GDP in the home country.

C) Value chain.

---

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.

土豆妮

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

---

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.

土豆妮

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.

---

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

土豆妮

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

---

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.

土豆妮

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

Stage of the business cycle

Investment

A) Economy slows Bonds

B) Recovery Interest-sensitive stocks

C) Late upswing Bonds

---

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.