Reading 38: Equity: Concepts and Techniques-LOS a 习题精选 between, elements, industry, structure, 2011

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Session 11: Equity Valuation: Industry and Company Analysis in a Global Context
Reading 38: Equity: Concepts and Techniques

LOS a: Distinguish between country analysis and industry analysis, and evaluate an industry's demand, life cycle, competition structure, and risk elements.

 

 

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

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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.

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

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

B) 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.

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

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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.

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

Stage of the business cycle

Investment

A) Recovery Commodities

B) Late cycle recession Bonds

C) Economy slows Interest-sensitive stocks

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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.

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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) slowing economy recovery

B) early upswing recession

C) late upswing early upswing

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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) 0.22 High

B) 0.17 Moderate

C) 0.22 Moderate

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

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Which of the following is most important to country analysis?

A) Expected GDP in the home country.

B) Competitive advantage.

C) Value chain.

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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.