Week 3

Question 1

What are the Two of the principle tenants of finance?

Answer 1

1. The value of any financial asset is equal to the PV of future cash flows
2. Law of One Price, equivalent assets should trade at the same value, regardless of where they are traded

Question 2

Difference between shares/stock and bonds

Answer 2

Shares/stock: part owner of company

Bonds: part lender to company

Question 3

What is value investor?

Answer 3

someone who determines a value of a stock before buying it

Question 4

Parts of business cycle

Answer 4

Peak, Recession, Trough, Expansion, Peak

Question 5

Three objectives of industry analysis

Answer 5

1. Sensitivity of the industry to key macroeconomic factors
2. How the industry operates and the key performance metrics for evaluating these operations
3. Competitive structure of the industry

Question 6

What are porter’s five forces?

Answer 6

Rivalry among existing firms
Threat of new entrants
Threat of substitute products
Bargaining power of buyers
Bargaining power of suppliers

Question 7

What is rivalry among existing firms?

Answer 7

higher degrees of competition among firms (price towards marginal cost, non-price dimensions more important)

Question 8

What are some determinants of the intensity of competition among firms?

Answer 8

• Industry growth rate
• Concentration and balance of competitors
• Degree of differentiation in products and services and switching costs
• Scale/Learning economies and ratio of fixed to variable costs
• Excess capacity and exit barriers

Question 9

What is threat of new entrants?

Answer 9

ease which a new firm can enter an industry will affect the profitability of other firms within the industry

Question 10

What are factors affecting barriers to entry?

Answer 10

• Economies of scale
• First mover advantage
• Relationships with suppliers and customers
• Legal barriers

Question 11

What is threat of substitute products?

Answer 11

• The degree to which substitute products or services exist affects the industry’s bargaining power with suppliers and customers, and ultimately profitability
• The degree to which substitutes exist depends upon the relative price and performance of competing products or services, and the willingness of customers to accept substitutes

Question 12

What is bargaining powers of buyers?

Answer 12

Buyer bargaining power can exert downward pressure on prices

Question 13

Factors that can affect bargaining power

Answer 13

Buyer price sensitivity to product or service

Relative bargaining power of buyers

Question 14

What is bargaining powers of suppliers?

Answer 14

mirror image of bargaining power of buyers
Suppliers have bargaining power when there are few substitutes and/or few suppliers relative to the number of customers demanding a product or service

Question 15

What are the parts of the industry life cycle?

Answer 15

Development
Growth
Shake-out
Maturity
Decline

Question 16

What is the development stage of the industry life cycle?

Answer 16

Low rivalry
High differentiation
innovation key

Question 17

What is the growth stage of the industry life cycle?

Answer 17

Low rivalry
High growth and weak buyers, low entry barriers
Growth ability key

Question 18

What is the shake-out stage of the industry life cycle?

Answer 18

Increasing rivalry
Slower growth and some exits
Managerial and financial strength key

Question 19

What is the maturity stage of the industry life cycle?

Answer 19

Stronger buyers
low growth and standard products, but higher entry barriers
Market share and cost key

Question 20

What is the decline stage of the industry life cycle?

Answer 20

Extreme rivalry
Typically many exists and price competition
Cost and commitment key

Question 21

What is the top down approach?

Answer 21

valuation approach that starts with an economic analysis

Question 22

What to consider when evaluating how depend a company is on the global economic conditions?

Answer 22

• Proportion of sales and operations which are domestic vs. foreign, and, in which economies
• Portion of supply chain reliant on foreign sources
• Location of competitor operations

Question 23

Common leading indicators of real GDP growth

Answer 23

• unemployment insurance claims
• consumer spending
• consumer confidence
• business orders
• business productivity
• housing and construction activity

Question 24

If interest rates reduce…

Answer 24

the cost of current consumption relative to future consumption, which tends to spur consumer spending

Question 25

In times of high inflation

Answer 25

businesses often find they are better off in nominal terms due to higher sales associated with high inflationary environments

Question 26

Inflation uncertainty ______ the risk of investing in financial assets and undermines the credibility of the domestic currency and economy

Answer 26

increases

Question 27

Increases in oil costs…

Answer 27

effect transportation and energy costs that effect virtually every business

Question 28

What is hedging activity?

Answer 28

• Hedging can have both a positive and negative effect on cash flows and business outcomes
• firm’s sensitivity to commodity prices, exchange rates and interest rates is influenced by hedging activity

Question 29

What are two basic competitive strategies?

Answer 29

• Cost leadership

- Product / service differentiation

Question 30

What are key analysis questions?

Answer 30

• What is the company’s business?
• What is the company’s competitive advantage?
• How durable is the firm’s competitive advantage?
• What forces are at play to promote competition?
• What protection does the firm have from competitors?

Question 31

What are factors to consider when analyzing a company?

Answer 31

• Know the Firm’s Products
• Know the Industry Competition
• Know the Technology
• Know the Firm’s Knowledge Base
• Know the Management

Question 32

What are peer groups?

Answer 32

Comparing apples to apples

• Stay consistent as possible
• Companies need to be similar in quality and product offers
• Not all competitors, companies just need to be as similar as possible