Exam II - Chapter 19

Question 1

When evaluating the quality of a company’s management, what questions should be asked?

Answer 1

1. (MANAGEMENT)
   What are the age and experience of management?
2. (STRATEGY)
   How effective is the company’s strategic planning?
3. (MARKETING)
   Has the company developed and followed a sound marketing strategy
4. (GLOBAL ENVIRONMENT)
   Does the company understand that it is part of a global environment?
5. (ADAPTION TO BUSINESS ENVIRONMENT)
   Has the company adapted to changes in the external business environment?
6. (COMPETITIVE POSITIONING)
   Has management maintained or improved the company’s competitive position?
7. (GROWTH)
   How has management managed the company’s growth?
8. (FINANCE AND RISK)
   Has the company been financed adequately and appropriately?
9. (UNION AND EMPLOYEE RELATIONSHIPS)
   Does the company have good relations with its unions and employees?
10. (PUBLIC IMAGE)
    What is the company’s public image?
11. (STRENGTH OF BOARD)
    What is the strength of the board of directors?

Question 2

Benjamin Graham and David Dodd (fathers of modern security analysis) suggest 4 divisions for a company report those being:

Answer 2

1. Description of the business, including information about senior management
2. Financial material – balance sheet and income statement data
   Earnings and dividends
3. Past stock price history and volume data
4. Projected financial statements and earnings forecasts showing the prospects of the company
   - All items that materially affect future earnings must be included in a company analysis report. -

Question 3

Graham and Dodd state that the company report should address 5 general issues those being:

Answer 3

1. Competitive position of the company
   Influences the quality and quantity of future earnings
2. Quality of management*
3. Current financial position
4. Company’s long-term financial position
5. Company’s profitability

Question 4

A leading or dominant company in an industry should:

Answer 4

Produce higher and more consistent future earnings.

True for any stage of the industry life cycle

Question 5

Leading companies offer lower-risk investment prospects. Companies that have higher dominant positions will:

Answer 5

• Have larger market share

- And can operate profitably

Question 6

How to determine if a company is in a strong competitive position within an industry, 7 traits:

Answer 6

1. Faster growth rate than industry
2. Higher profitability
3. Longer/broader product line
4. Innovation
5. Operating efficiency, low- cost production
6. Price leader
7. Proprietary technology

Question 7

Why is Southwest outcompeting its competitors and in a strong market position?

Answer 7

• Lower operating expenses
• Lower costs for customers
• Price leader
  Results in outpreforming stock price