Deck 13: Industry Analysis

Question 1

Exhibit 14.11
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While there is substantial dispersion in industry risk over periods of time, there is consistency in the industry risk during a period of time.

Answer 1

False

Question 2

The rates of returns for firms within an industry vary which indicates that company analysis is necessary after industry analysis.

Answer 2

True

Question 3

Exhibit 14.11
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The industry life cycle can be rejuvenated at any stage by product innovations that attract new customers or convince existing customers to buy the new product.

Answer 3

True

Question 4

Because all firms in an industry do not move together there is little value in industry analysis.

Question 5

Exhibit 14.11
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The micro approach to estimating the industry multiple would entail examining specific variables such as: dividend payout ratios, required rates of return, and expected growth rates of dividends and earnings.

Question 6

Exhibit 14.11
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Complete consistency over time for different industries would indicate that industry analysis is not necessary after market analysis.

Question 7

Exhibit 14.11
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Global industry analysis must evaluate the effects not only of world supply, demand and cost components for an industry, but also different valuation levels due to accounting conventions and the impact of exchange rates.

Question 8

When the government introduces a licensing requirement for an industry, it reduces the barriers to entry for the industry.

Question 9

Exhibit 14.11
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When considering inputs, you would evaluate an industry's prospects based on those of its raw material suppliers, labor force, etc.

Question 10

Exhibit 14.11
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Input-output analysis would be useful to indicate the long run relationship between industries.

Question 11

Exhibit 14.11
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Assuming the U.S. dollar is strong relative to the Euro, it will be easier for the U.S. paper industry to export to Germany.

Question 12

In the rapid accelerating growth stage, profit margins are typically very high.

Question 13

Exhibit 14.11
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The relationship between an economic series such as disposable personal income and industry sales is usually stronger in an industry that is more specialized.

Question 14

Exhibit 14.11
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Studies of industries indicate that their past performance can be useful in predicting future performance.

Question 15

Exhibit 14.11
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The fact that all firms in an industry do not move together negates the value of industry analysis.

Question 16

Exhibit 14.11
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"Downsizing" of corporate America in the 1990s is an example of structural change.

Question 17

Exhibit 14.11
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Structural changes occur when the economy undergoes a major organizational change or how it functions.

Question 18

The way to reduce the rivalry between existing competitors in an industry is to reduce the barrier to entry to the industry.

Question 19

Exhibit 14.11
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Switching from one industry group to another over the course of a business cycle is known as a rotation strategy.

Question 20

Exhibit 14.11
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The relationship between an economic series such as disposable personal income and retail sales is usually stronger in an industry that has become more specialized.

Question 21

Risk measures for different industries remain fairly constant over time, so the historical risk analysis is useful for estimating future risk.

Question 22

Which of the following is not a stage in the industrial life cycle?

A)Early pioneering development
B)Rapid accelerating growth
C)Acquisition and consolidation
D)Mature growth
E)Stabilization and market maturity

Question 23

The capital goods industry typically outperforms other sectors during a recession.

Question 24

An example of a barrier to entry is high prices relative to costs.

Question 25

At what stage in the industrial life cycle is there an influx of competition?

A)Early pioneering development
B)Rapid accelerating growth
C)Acquisition and consolidation
D)Mature growth
E)Stabilization and market maturity

Question 26

Which of the following is not a competitive force suggested by Porter?

A)Rivalry among existing competitors
B)Threat of new entrants
C)Threat of substitute products
D)Government and regulatory influences
E)None of the above (that is, all are competitive forces)

Question 27

All of the following are industries with a strong, consistent industry component except

A)Gold.
B)Steel.
C)Railroads.
D)Tobacco.
E)Paper.

Question 28

Country risk is the uncertainty of earning due to changes in exchange rates faced by firms in this industry that sell outside the United States.

Question 29

During which stage of the industrial life cycle is the product or service recognized as viable and the demand substantial?

A)Early pioneering development
B)Rapid accelerating growth
C)Acquisition and consolidation
D)Mature growth
E)Stabilization and market maturity

Question 30

Risk measures for different industries remain fairly constant over time so historical risk analysis can be useful when estimating future risk.

Question 31

In analyzing risk levels among industries, studies have found that

A)risk levels vary among different industries.
B)risk levels remained fairly constant across industries.
C)risk levels for the same industry varied over time.
D)risk levels for the same industry remain fairly constant over time.
E)Choices a and d

Question 32

What might cause an industry's sales to decline?

A)Changes in consumer tastes
B)Product obsolescence
C)Growth of substitute products
D)Sluggish economic growth
E)All of the above

Question 33

Which of the following statements about the business cycle is false?

A)Toward the end of a recession, financial stocks typically increase in value as investment and borrowing activities accelerate.
B)Once the economy hits a trough and begins to recover, consumer durable stocks become attractive investments.
C)Once the economy has recovered and current levels of consumption are sustainable, businesses may consider modernizing or expanding, thus stocks of capital goods industries become attractive investments.
D)As the business cycle reaches a peak, inflation rates decrease.
E)None of the above (that is, all are true statements)

Question 34

In which industrial life cycle stage do sales correlate highly with an economic series or the economy in general?

A)Pioneering development
B)Rapidly accelerating growth
C)Mature growth
D)Stabilization and market maturity
E)Deceleration of growth and decline

Question 35

Which of the following is not considered a structural influence on the economy and industry?

A)Demographics
B)Life-styles
C)International economics
D)Social values
E)Technology

Question 36

Cyclical industries are attractive investments during the early stages of an economic recovery.

Question 37

Consumer staples tend to outperform other industries the most at the peak of a business cycle.

Question 38

Structural changes do have a cyclical pattern.

Question 39

Switching industry groups over the course of a business cycle is known as a cyclical strategy.

Question 40

A number of economic variables affect both the economy and industries. Which of the following statements is false?

A)Industries with high levels of operating and financial leverage should benefit from lower inflation rates.
B)Banks generally benefit from volatile interest rates, while stable interest rates reduce margins.
C)Consumers who are optimistic about the economy will spend money on high-priced items, such as autos and houses.
D)The abundance or scarcity of input components can affect the perceived attractiveness of an industry.
E)None of the above (that is, all are true statements)

Question 41

Which of the following economic variables does not have an impact on industry analysis?

A)Inflation
B)Interest rates
C)International economics
D)Consumer sentiment
E)None of the above (that is, all of the above economic variables have at least some impact on industry analysis)

Question 42

Which of the following statements is false?

A)Returns for different industries vary within a wide range
B)Rates of return for individual industries vary over time
C)Rates of return of firms within industries vary over time
D)Different industries' risk levels vary within a wide range
E)Risk measures for different industries vary within a wide range over time

Question 43

Which of the following statements about industry analysis is true?

A)During any time period, rates of return of firms within industries do vary within a wide range.
B)Aggregate market performance accurately reflects the performance of alternative industries.
C)Risk of return for individual industries have not varied over time, so one can simply extrapolate past performance into the future.
D)All of the above are true.
E)None of the above are true.

Question 44

Toward the business cycle peak

A)Financial stocks rise on expectations of increases in loan demand, housing constructions and security offerings.
B)Consumer durable stocks rise on expectations of rising consumer confidence and personal income.
C)Capital goods stocks rise on expectation of increases in business capital spending.
D)Basic materials stocks rise on expectation of rising profit margins.
E)Consumer staple stocks rise on expectations that consumers will continue to spend on necessities.

Question 45

Which of the following statements concerning the competitive environment is true?

A)High fixed costs encourage firms to produce at a low level of capacity, in order to minimize fixed cost per unit produced.
B)Low current prices relative to costs in an industry indicate low barriers to entry.
C)Substantial economies of scale do not give a current industry member an advantage over a new firm.
D)The ability to substitute another product limits the industry's profit potential.
E)Buyers and suppliers do not influence the profitability of an industry.

Question 46

Toward the end of a recession,

A)Financial stocks rise on expectations of increases in loan demand, housing constructions and security offerings.
B)Consumer durable stocks rise on expectations of rising consumer confidence and personal income.
C)Capital goods stocks rise on expectation of increases in business capital spending.
D)Basic materials stocks rise on expectation of rising profit margins.
E)Consumer staple stocks rise on expectations that consumers will continue to spend on necessities.

Question 47

The financial risk for the retail store industry is difficult to judge because of

A)Convertible debt.
B)Numerous building leases.
C)Warrants.
D)Variable operating profits.
E)Extensive use of preferred stock.

Question 48

Analysts should identify and monitor

A)The current and emerging trends and patterns affecting an industry.
B)The indicators of trends and patterns in structural factors.
C)The momentum toward change in trends and patterns in structural factors.
D)Choices a and b
E)All of the above

Question 49

The ____ of an industry is a function of retention rate and return on equity.

A)Expected return
B)Expected business risk
C)Expected financial risk
D)Expected growth rate
E)Expected sales volatility

Question 50

Which of the following statements is not true?

A)During a specific time period, rates of return across industry do not vary substantially.
B)The rates of return for individual industries do vary substantially over time.
C)During a specific time period, rates of return within industries do vary substantially.
D)Risk measures for individual industries remain relatively constant over time.
E)None of the above (that is, all are true statements)

Question 51

Which of the following is not characteristic of the "growth" phase in the industry life cycle?

A)Consumer will accept uneven quality
B)Products have technical and performance differentiation
C)High advertising costs
D)Low profits
E)Many competitors

Question 52

Once it becomes clear the economy is recovering,

A)Financial stocks rise on expectations of increases in loan demand, housing constructions and security offerings.
B)Consumer durable stocks rise on expectations of rising consumer confidence and personal income.
C)Capital goods stocks rise on expectation of increases in business capital spending.
D)Basic materials stocks rise on expectation of rising profit margins.
E)Consumer staple stocks rise on expectations that consumers will continue to spend on necessities.

Question 53

When compared to the overall market P/E, the retail store P/E was estimated to be ____ and near the ____ of the range.

A)More volatile, low end
B)More volatile, high end
C)Less volatile, low end
D)Less volatile, high end
E)Equally volatile, middle

Question 54

During a recession,

A)Financial stocks rise on expectations of increases in loan demand, housing constructions and security offerings.
B)Consumer durable stocks rise on expectations of rising consumer confidence and personal income.
C)Capital goods stocks rise on expectation of increases in business capital spending.
D)Basic materials stocks rise on expectation of rising profit margins.
E)Consumer staple stocks rise on expectations that consumers will continue to spend on necessities.

Question 55

A number of factors affect the cash flow and risk prospects of different industries. Which of the following is not such a factor?

A)Demographics
B)Life-styles
C)Technology
D)Politics
E)None of the above (that is, all are factors to be considered)

Question 56

If the economic outlook was such that you expected corporate earnings to decline, consumers have excessive levels of debt, and there is significant overcapacity in the technology sector, then an appropriate asset allocation policy would be to:

A)Overweight equity especially technology stocks and underweight bonds
B)Underweight equity especially technology stocks and overweight bonds
C)Overweight equity especially technology stocks and overweight bonds
D)Underweight equity especially technology stocks and underweight bonds
E)None of the above

Question 57

At the initial stage of an economic recovery,

A)Financial stocks rise on expectations of increases in loan demand, housing constructions and security offerings.
B)Consumer durable stocks rise on expectations of rising consumer confidence and personal income.
C)Capital goods stocks rise on expectation of increases in business capital spending.
D)Basic materials stocks rise on expectation of rising profit margins.
E)Consumer staple stocks rise on expectations that consumers will continue to spend on necessities.

Question 58

When forecasting industry sales it can be useful to

A)Utilize the industry life cycle.
B)Use input-output analysis.
C)Use the relationship between an industry and the aggregate economy.
D)All of the above.
E)None of the above.

Question 59

Which of the following is not characteristic of the "decline" phase of the industry life cycle?

A)Little product differentiation
B)Substantial manufacturing overcapacity
C)Many competitors
D)Falling prices
E)None of the above (this is, all are characteristics of the "decline" phase)

Question 60

Which of the following is not considered a basic competitive force?

A)Rivalry among existing competitors
B)Threat of new entrants
C)Threat of substitute products
D)Threat of government interference
E)Bargaining power of buyers and suppliers

Question 61

During a recession which industry is most likely to excel?

A)Consumer staples
B)Consumer durables
C)Basic industries
D)Financial stocks
E)Capital goods

Question 62

To estimate earnings per share an analyst will start by estimating

A)Profits
B)Free cash flows
C)Sales
D)Number of shares outstanding
E)All of the above

Question 63

Exhibit 13.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Assume that you are an analyst for the U.S. Autoparts Industry. Consider the following information that you propose to use to obtain an estimate of year 2002 EPS for the U.S. Autoparts Industry:
In addition a regression analysis indicates the following relationship between growth in industry sales per share and personal consumption expenditures (PCE) growth is
% $\Delta$ Sales per share = 0.02 + 1.5(% $\Delta$ PCE)

-Refer to Exhibit 13.1. Calculate the per share interest rate charge for the year 2004.

A)$12.93
B)$17.72
C)$10.07
D)$13.76
E)$18.59

Question 64

Exhibit 13.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Assume that you are an analyst for the U.S. Autoparts Industry. Consider the following information that you propose to use to obtain an estimate of year 2002 EPS for the U.S. Autoparts Industry:
In addition a regression analysis indicates the following relationship between growth in industry sales per share and personal consumption expenditures (PCE) growth is
% $\Delta$ Sales per share = 0.02 + 1.5(% $\Delta$ PCE)

-Refer to Exhibit 13.1. Calculate the industry EBT per share for the year 2004.

A)$53.29
B)$67.89
C)$68.75
D)$59.63
E)$57.49

Question 65

Exhibit 13.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Assume that you are an analyst for the U.S. Autoparts Industry. Consider the following information that you propose to use to obtain an estimate of year 2002 EPS for the U.S. Autoparts Industry:
In addition a regression analysis indicates the following relationship between growth in industry sales per share and personal consumption expenditures (PCE) growth is
% $\Delta$ Sales per share = 0.02 + 1.5(% $\Delta$ PCE)

-Refer to Exhibit 13.1. Obtain an estimate of the per share depreciation charge for the year 2004.

A)$15.81
B)$12.35
C)$23.68
D)$25.93
E)$35

Question 66

Which of the following are not typically considered a threat of new entrants to an industry?

A)Low current prices relative to costs
B)Large capital requirements
C)Extensive distribution channels with exclusive distribution contracts
D)Government policy restricting access to raw materials
E)Large volume purchases relative to the sales of a supplier

Question 67

Exhibit 13.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Assume that you are an analyst for the U.S. Autoparts Industry. Consider the following information that you propose to use to obtain an estimate of year 2002 EPS for the U.S. Autoparts Industry:
In addition a regression analysis indicates the following relationship between growth in industry sales per share and personal consumption expenditures (PCE) growth is
% $\Delta$ Sales per share = 0.02 + 1.5(% $\Delta$ PCE)

-Refer to Exhibit 13.1. Calculate the per share EBIT for the year 2004.

A)$95.33
B)$70.42
C)$85.56
D)$95.89
E)$75.32

Question 68

Which of the following statements regarding cyclical industries is true?

A)Cyclical industries are affected by changes in consumer sentiment.
B)Cyclical industries are not affected by the consumer's willingness to borrow and spend money.
C)Cyclical industries often outperform other sectors during a recession.
D)All of the above statements are true.
E)None of the above statements are true.

Question 69

Exhibit 13.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Assume that you are an analyst for the U.S. Autoparts Industry. Consider the following information that you propose to use to obtain an estimate of year 2002 EPS for the U.S. Autoparts Industry:
In addition a regression analysis indicates the following relationship between growth in industry sales per share and personal consumption expenditures (PCE) growth is
% $\Delta$ Sales per share = 0.02 + 1.5(% $\Delta$ PCE)

-Refer to Exhibit 13.1. Calculate industry EPS for the year 2004.

A)$45.25
B)$36.79
C)$57.25
D)$32.56
E)$48.57

Question 70

Which of the following statements regarding global industry analysis is true?

A)Cavaglia, Brightman, and Aked (2000) found that country factors dominated industry factors in terms of explaining equity returns.
B)Cavaglia, Brightman, and Aked (2000) found that industry factors have been declining in importance.
C)Cavaglia, Brightman, and Aked (2000) found that industry factors dominate country factors.
D)Both a and b are true
E)All of the above are true

Question 71

Exhibit 13.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Assume that you are an analyst for the U.S. Autoparts Industry. Consider the following information that you propose to use to obtain an estimate of year 2002 EPS for the U.S. Autoparts Industry:
In addition a regression analysis indicates the following relationship between growth in industry sales per share and personal consumption expenditures (PCE) growth is
% $\Delta$ Sales per share = 0.02 + 1.5(% $\Delta$ PCE)

-Refer to Exhibit 13.1. Calculate industry total assets per share for the year 2004.

A)$450
B)$565.67
C)$513.58
D)$479.07
E)$385.77

Question 72

Towards the end of the recession which industry is most likely to excel?

A)Consumer staples
B)Consumer durables
C)Basic industries
D)Financial stocks
E)Capital goods

Question 73

Exhibit 13.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Assume that you are an analyst for the U.S. Autoparts Industry. Consider the following information that you propose to use to obtain an estimate of year 2002 EPS for the U.S. Autoparts Industry:
In addition a regression analysis indicates the following relationship between growth in industry sales per share and personal consumption expenditures (PCE) growth is
% $\Delta$ Sales per share = 0.02 + 1.5(% $\Delta$ PCE)

-Refer to Exhibit 13.1. Calculate the industry year 2004 EBITDA per share.

A)$95.05
B)$89.15
C)$92.56
D)$94.73
E)$86.23

Question 74

An increase in any of the following will cause the expected dividend growth rate to increase for an industry except

A)Profit margin
B)Total asset turnover
C)Return on equity
D)Dividend payout ratio
E)Financial leverage

Question 75

During which industry life cycle stage do firms experience low rates of return on capital and investors begin to seek alternative uses of capital?

A)Pioneering and development
B)Mature growth
C)Stabilization and market maturity
D)Deceleration of growth and decline
E)Disassembly and restructure

Question 76

Exhibit 13.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Assume that you are an analyst for the U.S. Autoparts Industry. Consider the following information that you propose to use to obtain an estimate of year 2002 EPS for the U.S. Autoparts Industry:
In addition a regression analysis indicates the following relationship between growth in industry sales per share and personal consumption expenditures (PCE) growth is
% $\Delta$ Sales per share = 0.02 + 1.5(% $\Delta$ PCE)

-Refer to Exhibit 13.1. Calculate personal consumption expenditures for the year 2004.

A)$7,500 billion
B)$7,000 billion
C)$7140 billion
D)$7,550.5 billion
E)$6,825.75 billion

Question 77

Exhibit 13.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Assume that you are an analyst for the U.S. Autoparts Industry. Consider the following information that you propose to use to obtain an estimate of year 2002 EPS for the U.S. Autoparts Industry:
In addition a regression analysis indicates the following relationship between growth in industry sales per share and personal consumption expenditures (PCE) growth is
% $\Delta$ Sales per share = 0.02 + 1.5(% $\Delta$ PCE)

-Refer to Exhibit 13.1. Estimate the industry sales per share for the year 2004.

A)$574.9
B)$600.0
C)$585.03
D)$625
E)$550

Question 78

Exhibit 13.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Assume that you are an analyst for the U.S. Autoparts Industry. Consider the following information that you propose to use to obtain an estimate of year 2002 EPS for the U.S. Autoparts Industry:
In addition a regression analysis indicates the following relationship between growth in industry sales per share and personal consumption expenditures (PCE) growth is
% $\Delta$ Sales per share = 0.02 + 1.5(% $\Delta$ PCE)

-Refer to Exhibit 13.1. Estimate the industry growth rate in sales per share.

A)10.5%
B)11%
C)12.16%
D)9.5%
E)8.73%

Question 79

Exhibit 13.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Assume that you are an analyst for the U.S. Autoparts Industry. Consider the following information that you propose to use to obtain an estimate of year 2002 EPS for the U.S. Autoparts Industry:
In addition a regression analysis indicates the following relationship between growth in industry sales per share and personal consumption expenditures (PCE) growth is
% $\Delta$ Sales per share = 0.02 + 1.5(% $\Delta$ PCE)

-Refer to Exhibit 13.1. Calculate industry level of debt for the year 2004.

A)$215.58
B)$300.75
C)$237.67
D)$285.98
E)$193.72

Question 80

Which of the following statements is false?

A)Financial institutions are typically adversely impacted by higher rates of interest.
B)Industries with high operating leverage typically benefit with inflation when their costs are fixed in nominal terms.
C)Industries with low financial leverage typically outperform firms with higher leverage when inflation increases.
D)A weaker U.S.dollar typically helps U.S.industries.
E)Consumer cyclical industries are affected by increasing interest rates.