Reading 34 - Industry and Company Analysis

Question 1

What are the 3 approaches for developing inputs to equity valuation models?

Answer 1

1. Bottom-up
2. Top-down
3. Hybrid

Question 2

Describe the Bottom-Up approach…

Answer 2

Anaylsis starts at an individual company or its reportable segments.

Question 3

Describe the Top-Down approach

Answer 3

Anaylsis begins with expactations about a macroeconomic varible, often expected growth rate of nominal GDP

Question 4

Describe the Hybrid approach

Answer 4

Incorporates elements of both top-down and bottom-up analysis. By using both elements, a hybrid analsis can highlight inconsistencies in the assumptions between the top-down and bottom-up approaches

Question 5

Describe the “growth relative to GDP growth” approach to forecasting revenue…

Answer 5

the relationship between GDP and company sales could be modeled as “GDP growth plus x%”

Question 6

Describe Economies of Scale….

Answer 6

when the average cost of productions decreases as industry sales increase

Question 7

What are the three primary tax rates used in analysis of Income Tax expense?

Answer 7

1. Statuatory Rate - is the % tax charged in the country where the firm is domiciled
2. Effective Tax Rate - is income tax expense as a % of pretax income on the income statment
3. Cash Tax Rate - is cash taxes paid as a percentage of pretax income

Question 8

How do you calculate return on invested capital (ROIC) ?

Answer 8

Question 9

What are the four events that can cause inflection points?

Answer 9

1. Overall economic environment
2. Business cycle stage
3. Government regulations
4. Technology

Question 10

What are the 9 steps in developing a sales based pro-forma model:

Answer 10

1. Estimate revenue growth and future expected growth
2. Estimate COGS
3. Estimate SG&A
4. Estimate financing costs
5. Estimate income tax expense and cash taxes
6. Estimate cash taxes, taking into account changes i deferred tax items
7. Model the balance sheet based on items that flow from the income statement
8. Use depreciation and capital expenditures
9. Use the completed pro forma income statement and balance sheet to construct a pro-forma cash flow statement