Chapter 12 - Macroeconomic & Industry Analysis

Question 0

What are the 2 broad-based aspects of fundamental analysis?

Answer 0

1. Macroeconomics

2. Industry Analysis

Question 1

What is the analysis of determinants of firm value, such as prospects for earnings and dividends?

Answer 1

Fundamental Analysis

Question 2

3 approaches to fundamental analysis (from notes)

Answer 2

1. Global (and domestic) economic analysis
2. Industry Analysis
3. Company Analysis

Question 3

True or False:
Top-down approach DOESN’T call for analysis of the economy with the goal of identifying industries and companies that will perform well in that economic environment.

Answer 3

FALSE!!!!

Question 4

What international economic factors might affect a firm’s success?

Answer 4

1. export prospects
2. price competition from foreign competitors
3. profits from investments abroad

Question 5

the concept ‘it is harder for businesses to succeed in a contracting economy than in an expanding one is called _____?

Answer 5

country/region performance variability

Question 6

3 GLOBAL economic considerations

Answer 6

1. highly country/region performance variability (comparing against)
2. Political risk
3. Exchange rate risk (sales, profits, stock returns)

Question 7

examples of political risk

Answer 7

1. currency crisis (euro crisis - interplay btw politics and economics)
2. government bailouts
3. government budget deficit issues
4. Protectionism
5. Trade Policy
6. Free Flow of capital
7. Status of nation’s workforce

Question 8

_____ is the rate at which domestic $$ can be converted into foreign $$$

Answer 8

Exchange Rate (p.374)

Question 9

appreciation vs depreciations (dollar for example)

Answer 9

less dollars needed vs. more dollars are needed

Question 10

What are the 6 Key macroeconomic indicators (p.376)

Answer 10

1. Gross Domestic Product
2. Unemployment Rates
3. Interest Rates
4. Inflation
5. Budget Deficit
6. Consumer (public market) Sentiment

Question 11

what is the measure of the economy’s TOTAL production of goods & services?

Answer 11

Gross Domestic Product (GDP)

Question 12

what another popular measure of economic activity more narrowly focuses on manufacturing side of the economy?

Answer 12

Industrial production

Question 13

% of total labor force yet to find work. measures extent to which economy is at full capacity operation

Answer 13

unemployment rate

Question 14

ratio of actual output from factories to potential output

Answer 14

capacity utilization rate (p.376)

Question 15

______is the rate at which general level of prices is rising.

Answer 15

Inflation

Question 16

‘overheated’ economies refer to what?

Answer 16

high rates of inflation

Question 17

_____ reduces PV of cash flows & reduces attractive investment opportunities. also affects housing and auto financings.

Answer 17

high Interest Rates

Question 18

____ is when government spends more than they earn (and must borrow for shortfalls). forces interest rates rise due to raising demand & ‘crowd out’ funds available to the private sector.

Answer 18

budget deficit

Question 19

perhaps most important macroeconomic factor to consider in investment analysis

Answer 19

interest rates

Question 20

4 fundamental factors of interest rate determinents

Answer 20

1. Supply of funds (household savers)
2. Demand for funds (businesses)
3. Government net supply/demand for funds (Federal Reserves)
4. Expected rate of inflation

Question 21

True or false.

At higher real interest rates, households will choose to save more than spend; opting to use later future disposal [supply curve rises]

Answer 21

True

Question 22

True or False.

Lower real interest rates does NOT spur more business investments on physical capital. [demand curves up?]

Answer 22

False & FALSE!!!

Question 23

the point of intersection of the supply and demand curves, point ‘E’

Answer 23

Equilibrium interest rate

Question 24

"shifting" the actual supply and/or demand curves is done by? thru fiscal & monetary policies

Answer 24

the government (Federal Reserves)

Question 25

if government is net borrower, it shift _____ curve and interest rates ____

Answer 25

demand; increases

Question 26

if government is net supplier, increases _____ curve and interest rates _______?

Answer 26

supply; decreases

Question 27

_____ = real interest rate + inflation

Answer 27

nominal interest rate (p. 378)

Question 28

______ is an even that affects demand for goods and services in the economy. i.e. - reduced tax rate, increased $$ supply, increase government spending, increase foreign export demand

Answer 28

Demand Shock

Question 29

_____ is an event that influences production capacity and costs. i.e. - imported oil prices, natural disasters, workforce educational level, labor wage rates changes

Answer 29

Supply Shock

Question 30

T or F. | Demand shock moves same direction as interest rates & inflation

Answer 30

true

Question 31

T or F. | Supply shock moves in opposite direction of interest rates & inflation.

Answer 31

True

Question 32

demand-side policy include....

Answer 32

spending tax levels monetary policy (supply and interest rates)

Question 33

Supply-side policy include: 7

Answer 33

``` capacity improvements work incentives innovation education infrastructure R&D Marginal Tax rates? (p. 382) ```

Question 34

Fiscal policy refers to _____ and ____. Most DIRECT and immediate impact on economy; but slow formation and implementation; rigid system.

Answer 34

gov spending; taxation actions

Question 35

Monetary policy targets ______ and ______. Largely focused on interest rates. more supply lowers SHORT-TERM interest rates, but may cause inflation. Easy to formulate and implement but LESS immediate impact. (Feds - Treasury securities, discount rates to banks, reserve requirements)

Answer 35

money supply; interest rates

Question 36

3 tools of monetary policy actions

Answer 36

1. Treasury Securities 2. Discount rate (to banks) 3. Reserve requirements

Question 37

______ recurring cycles of recession and recovery? Also refers to periods of expansion and contractions.

Answer 37

business cycles

Question 38

what is the transition from the end of an expansion to start of contraction in the economy?

Answer 38

peak

Question 39

what is at the bottom of a recession to the beginning of recovery in the economy?

Answer 39

Trough

Question 40

_____ is the period from peak to trough.

Answer 40

Contraction

Question 41

______ is the period from trough to peak.

Answer 41

Expansion

Question 42

what's it called when a business has above-average sensitivity to the state of the economy. (capital goods, autos, washing machines....) Stocks rise the most in good times but also falls most in bad, and tend to have HIGH BETA stocks.

Answer 42

cyclical industries

Question 43

firms having little sensitivity to the business cycles. (food producers, pharmacy, utilities, healthcare)

Answer 43

Defensive industries

Question 44

define 'leading economic indicators'

Answer 44

economic series of events that rise and fall IN ADVANCE of the economy results.

Question 45

coincident indicators?

Answer 45

move in tandem with the economy

Question 46

lagging indicators

Answer 46

generally occurs after the broad economy

Question 47

*Average weekly hours of production workers *Stock Market Price Index Unemployment Claims Yield curve (spread from 10yr Tbond and fed fund rate) Money Supply growth rate Consumer expectations Company slow delivery reports...etc

Answer 47

Leading Indicators

Question 48

Average duration of unemployment Ratio of trade inventories to sales Average prime rate charged Commercial & Industrial loans outstanding *Ratio of consumer credit outstanding to personal income, etc

Answer 48

Lagging Indicators

Question 49

Just as it varies in macroeconomic factors, a firm's performance may vary also in its given industry. This is the reason we must conduct ______ also?

Answer 49

Industry Analysis

Question 50

NAICS codes. What does it stand for and its meaning?

Answer 50

1. North American Industry Classification System | 2. it is a classification of firms into industry groups using numerical codes to identify industry.

Question 51

3 factors that determine sensitivity of firm's earnings o business cycle

Answer 51

1. Sensitivity of Sales (necessities vs. luxury) 2. Operating Leverage (division btw fixed & variable costs) 3. Financial Leverage (debt interest payments - form of fixed costs)

Question 52

firms with high fixed costs are said to have ______ operating leverage

Answer 52

high

Question 53

______ is an investment strategy that entails shifting the portfolio into industry sectors that are expected to outperform other based on macroeconomic forecasts (re-adjust investment portfolio holdings)

Answer 53

Sector Rotation

Question 54

Near peak or overheated economy, good to invest in _____

Answer 54

natural resource extraction and processing

Question 55

in contraction/recession conditions, one should invest in _______ industries such as pharmaceuticals, food, necessities. near end, lowered inflation & interest rates favor financial firms

Answer 55

defensive

Question 56

at trough point of cycle, poised for recovery & expansion. invest in ______ industries such as equipment, transportation, construction

Answer 56

Capital Goods

Question 57

In expansion point of cycle, rapid economic growth. investments in consumer _____ and ______ items such as designer companies, auto industries, high-tech firms...etc

Answer 57

durables; luxury

Question 58

what's it called when firms experience stages through which they mature

Answer 58

industry life cycle

Question 59

4 stages of life cycle

Answer 59

1. start-up (extreme rapid growth) 2. consolidation (stability) 3. maturity (slowing down, 'cash cows' w/stable dividends, low risk) 4. Relative Decline (minimal or negative growth, obsolescence?)

Question 60

Lynch's 6 life-cycle groups

Answer 60

1. Slow Gro