Kap 6-9

Question 1

1. What is ESG short for?

Answer 1

Environmental, social, governance

Question 2

2. Give two examples of environmental criteria in ESG.

Answer 2

1, the energy a company takes in and the waste it discharges.

2, The consequences for living beings.

The legal environment it has to encounter

Question 3

3. What two factors are most common when discussing social criteria in ESG?

Answer 3

1, The relationships a company has.

2, The reputation the company fosters with people and institutions the communities in which is does business.

Answer: Relationships and reputation

Question 4

4. What is governance?

Answer 4

Explanation: Governance is the internal system of practice, controls, and procedures a company adopts in order to govern itself, make effective decisions, comply with the law, and meet the needs of external stakeholder.

Answer: System of practices, controls and procedures

Question 5

5. What was the conclusion relating to cost reductions by the help of ESG, in research conducted by McKinsey.

Answer 5

It can reduce costs as much as 60 percent, such as reducing raw materials, cost of water, cost of carbon.

Question 6

1. What key-ratios are normally used to group companies into “growth” or “value”?

Answer 6

Market-to-book and P/E

Question 7

2. How is a growth company defined?

Answer 7

High P/E and high market-to-book.

Question 8

4. What did the authors found in the group growth companies, relating to return on capital?

Answer 8

Growth stocks tend to have high ROIC and value stocks low

Question 9

5. What return to shareholders have U.S equities delivered the past 200 years?

Answer 9

Consistent returns to shareholders of about 6,75% annually.

6,75%

Question 10

6. How large part of the shareholder return in the US have come from cash yield and from share appreciation, respectively?

Answer 10

Share price appreciation 3-3,5%, cash yield 3,25-3,75%

Question 11

7. What has been the average pay-out ratio in the US?

Answer 11

50-60%

Question 12

9. How has the p/e-ratio been affected by high inflation?

Answer 12

It has lowered the P/E

Question 13

10. What is the relationship between high market value to earnings and ROIC?

Answer 13

The higher ROIC, the higher MV/earnings

Question 14

11. Why does companies with a high intensity in share repurchase programs, also in general have high shareholder value creation?

Answer 14

Companies with higher return on capital and growth tend to pay-out more cash to
shareholders.

Question 15

1. What is the SCP-structure and which researcher developed the structure further in the beginning of the eighties?

Answer 15

The model explains how strategy, competitive advantage and share prices are linked

Question 16

2. What is the reason for the differences in profitability the last 20 years between branded consumer goods and extraction industries?

Answer 16

Which of the following is NOT correct?

The median company in the extraction industry has high return on capital, averaging 9 percent the last 20 years.

Question 17

3. Which are the five sources of competitive advantage, to allow companies to charge price premiums? Which one is NOT correct??

1, Innovative products: Difficult to copy, patented service of products.

2, Quality: Customers are willing to pay a higher price when they perceive quality differences (think watches).

3, Brand: Customers are willing to pay for a premium brand, even though there is no difference in the product.

4, Customer lock-in: Customers that don ́t want or can ́t switch to another competitive product or service (Gillette, byte av rakblad).

5, Rational price discipline: Prices established by large industry leaders. (Airline seats).

Answer 17

5, Rational price discipline: Prices established by large industry leaders. (Airline seats).

Question 18

4. Which are the four sources of competitive advantage, to cost and capital efficiency?

Answer 18

1, Innovate business method: Difficult-to-copy business method that contrast with established industry practice (IKEA).
2, Unique resources: Advantage from unique access to raw material (mining). 3, Economies of scale: Efficient scale or size for the relevant market (Amazon).
4, Scalable product/process: Ability to add customers and capacity at low margin cost. (Paypal).
Innovative business method, unique resources, economies of scale

Question 19

5. Which are the three factors determining if a company can have a sustainable high ROIC?

Answer 19

Length of product life, competitive advantage, product renewal

Question 20

6. On what level has the median ROIC been in US companies after 2010?

A) 13%
B) 17%
C) 7%
D) 9%

Answer 20

17 percent

Question 21

7. Which type of industries tend to have a high median ROIC? What is the characteristic for this group of companies?

A) Pharmaceuticals

B) Packages and Customer goods

C) Oil

Answer 21

A)

Question 22

8. Which is most stable over time – ROIC or growth?

Answer 22

• ROIC is most stable over time.

- Growth inevitably declines over time. ROIC

Question 23

9. What is the conclusions regarding superior performance in ROIC over time? What is the conclusion regarding the group of high-performing companies?

Answer 23

High-performing companies are in general good at sustaining a competitive advantage

Question 24

1. Which are the three main components for growth?

A) Entry into new markets, M&A, R&D

B) Portfolio momentum, market share performance, M&A

C) Competition, M&A, Portfolio Momentum

Answer 24

Portfolio momentum, market share performance, M&A

Question 25

Which two sectors had the highest median growth rate? Which two were at the bottom?

Answer 25

Pharmaceuticals, biotechnology at the top and household durables, unitilities at the bottom

Question 26

3. Which three types of growth strategies have a value creation below average?

Answer 26

Merger and acquisitions (M&A), gain share from rivals through product promotion and pricing. Which of the following is NOT correct. Convince existing customers to buy more of a product

Question 27

4. Explain the so-called S-curve in sustaining growth and how it relates to market penetration.

Answer 27

The market for a product follows an S-curve over its life cycle. At maximum penetration it starts to fall back to the same rate as the economy

Question 28

5. What is the only way to sustain consistently high growth? A) Expand into markets B) Retain customers C) Consistently find new product markets

Answer 28

Consistently find new product markets

Question 29

6. In a study of US-based non-financial companies 1965-2017, there were some conclusions regarding the sustainability for high growth – which?

Answer 29

- High growth rates decline quickly. Companies that had grown 20% typically grew 8% within 5 years and 5% within 10 years. - Extremely large companies struggle to grow. which of the following were NOT included? Real revenue growth fluctuated between 8 to 12 percent, with significant stability.

Question 30

7. There are three possible explanations to why the inflation adjusted average corporate growth rate of 4.9 percent 1965-2017 is higher than the GDP growth in the U.S of 3.0 percent – which three?

Answer 30

1, Self-selection: Companies with good growth opportunities need capital to grow. High- growth companies are more likely to be publicly traded. 2, As companies become more specialized and outsource more, firms providing service will grow and develop quickly without affecting the GDP numbers (Apple outsources = The numbers aggregate) 3, Global expansion = Companies in the study generate revenue outside the US, so they can grow faster than the US GDP without gaining sales in the US.

Question 31

8. Which two sectors have had the fastest growth 2007-2017? Which two has performed worst?

Answer 31

Biotechnology, pharmaceuticals (best). Utilities, household durables (worst)

Question 32

9. In a study of growth rates since 1963 the companies were separated into quintiles based on growth. What was the difference the fifth year and the tenth year, respectively between the highest and the lowest quintile and what is the conclusion for sustainable growth?

Answer 32

The highest growth portfolio outperformed the one with the lowest growth by less than five

Question 33

10. How many of the high growth companies managed to maintain at least 15 percent yearly growth after ten years? How many of the low growth (below 5 percent) companies?

Answer 33

A total of 65 percent of companies growing with 5 percent managed 5 percent ten years later, while only 21 percent of high-growth companies managed better than 15 percent ten years after.