Equity lvl 2 - Reading 33 (Industry and Co. Analysis)

Question 1

define “growth relative to GDP growth” approach

Answer 1

using GDP and company sales to model growth. GDP x (1+ comp. rev growth”

Question 2

define “market growth and market share” approach

Answer 2

estimate of industry sales (mkt growth) and company revenue as % of industry sales (market share). company revenue = mkt grwth x mkt share

Question 3

will company have economies of scale when they exhibit higher op. margins?

Answer 3

yes, because lower average cost

Question 4

will companies have economies of scale when they are larger or smaller?

Answer 4

larger because their margins tend to be bigger and this leads to economies of scale

Question 5

economies of scale - what to look for in common size income stmt?

Answer 5

COGS lower as proportion of sales and lower SG&A as proportion of sales

Question 6

Define gross interest expense

Answer 6

“level of debt and market interest rates”

Question 7

Define net debt

Answer 7

“gross debt - cash, cash equiv., short-term securities”

Question 8

Define net interest expense

Answer 8

“gross interest expense - interest income on cash and short-term debt securities”

Question 9

Define statutory tax rate

Answer 9

”% tax charged in country where firm is domiciled”

Question 10

Define effective tax rate

Answer 10

“income tax expense as % of pretax income on income statement”

Question 11

Define cash tax rate

Answer 11

“cash taxes paid as % of pretax income”

Question 12

Formula: income tax expense (lvl 1 reminder)

Answer 12

cash tax due + changes in DTL - change in DTA

Question 13

What is effect on effective tax rate if company has higher earning growth in a HIGH tax environment?

Answer 13

when earning growth is higher in high tax country, effective rate rate will increase

Question 14

Difference btwn capital expenditures for maintenance vs. capital expenditures for growth?

Answer 14

CAPEX for Maint. should use historical depreciation + inflation rate because replacement cost will increase with inflation

Question 15

Formula: ROIC (return on invested capital)

Answer 15

NOPLAT / (Op. assets - Op liab.)

(Invested capital = Op assets - op liab). NOPLAT = net op profit adjusted for taxes

Question 16

Define ROIC (return on invested capital)

Answer 16

return to both equity and debt and is preferable to ROE in some cases because allows comparisons across firms with diff capital structures

Question 17

Formula for return on capital employed

Answer 17

Pretax Op earnings/ (op assets - op liab)

Question 18

why would you use return on capital employed vs. ROIC

Answer 18

to compare companies that have different tax rates

Question 19

Porter: threat of substitute high, switching cost low = more or less pricing power?

Answer 19

Less pricing power

Question 20

Porter: When intensity of industry rivalry is high = more or less pricing power?

Answer 20

less pricing power. Usually with less concentration, fixed costs and exit barriers high.

Question 21

Porter: when exit barriers are high, more or less pricing power?

Answer 21

less pricing power

Question 22

Porter: When bargaining power of suppliers is high, earnings growth is lower or higher?

Answer 22

usually lower because there are not many suppliers

Question 23

Porter: When barg. power of customer is higher, switching costs low = more or less pricing power for comps?

Answer 23

less pricing power, especially when there is a small # of customers making up large proportion of company sales

Question 24

Porter: When threat of new entrants is low = more or less pricing power for companies?

Answer 24

more pricing power and potentially better earning growth

Question 25

Effects of increasing product’s price depend on what?

Answer 25

product’s elasticity of demand. (when elastic demand, price increase will reduce total sales rev)

Question 26

A firm that increases costs before other companies will face more or less decrease to their sales rev?

Answer 26

sales rev will decrease more than if they waiting for other firms to do it first

Question 27

Define normalized earnings

Answer 27

“expected earnings when the current (temp) effects of events or cyclicality are no longer affecting earnings”

Question 28

Define inflection points

Answer 28

“those instances when the future will not be like the past, due to change in chomp/industry competitive environ. or overall economy”

Question 29

Define sales-based pro forma financial statement

Answer 29

“end result of all assumptions and estimates developed using multiple techniques” (like estimating COGS, SG&A, revenue growth, estimating financing costs, etc)