Week 3 Flashcards
What are the Two of the principle tenants of finance?
- The value of any financial asset is equal to the PV of future cash flows
- Law of One Price, equivalent assets should trade at the same value, regardless of where they are traded
Difference between shares/stock and bonds
Shares/stock: part owner of company
Bonds: part lender to company
What is value investor?
someone who determines a value of a stock before buying it
Parts of business cycle
Peak, Recession, Trough, Expansion, Peak
Three objectives of industry analysis
- Sensitivity of the industry to key macroeconomic factors
- How the industry operates and the key performance metrics for evaluating these operations
- Competitive structure of the industry
What are porter’s five forces?
Rivalry among existing firms Threat of new entrants Threat of substitute products Bargaining power of buyers Bargaining power of suppliers
What is rivalry among existing firms?
higher degrees of competition among firms (price towards marginal cost, non-price dimensions more important)
What are some determinants of the intensity of competition among firms?
- 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
What is threat of new entrants?
ease which a new firm can enter an industry will affect the profitability of other firms within the industry
What are factors affecting barriers to entry?
- Economies of scale
- First mover advantage
- Relationships with suppliers and customers
- Legal barriers
What is threat of substitute products?
- 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
What is bargaining powers of buyers?
Buyer bargaining power can exert downward pressure on prices
Factors that can affect bargaining power
Buyer price sensitivity to product or service
Relative bargaining power of buyers
What is bargaining powers of suppliers?
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
What are the parts of the industry life cycle?
Development Growth Shake-out Maturity Decline
What is the development stage of the industry life cycle?
Low rivalry
High differentiation
innovation key
What is the growth stage of the industry life cycle?
Low rivalry
High growth and weak buyers, low entry barriers
Growth ability key
What is the shake-out stage of the industry life cycle?
Increasing rivalry
Slower growth and some exits
Managerial and financial strength key
What is the maturity stage of the industry life cycle?
Stronger buyers
low growth and standard products, but higher entry barriers
Market share and cost key
What is the decline stage of the industry life cycle?
Extreme rivalry
Typically many exists and price competition
Cost and commitment key
What is the top down approach?
valuation approach that starts with an economic analysis
What to consider when evaluating how depend a company is on the global economic conditions?
- 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
Common leading indicators of real GDP growth
- unemployment insurance claims
- consumer spending
- consumer confidence
- business orders
- business productivity
- housing and construction activity
If interest rates reduce…
the cost of current consumption relative to future consumption, which tends to spur consumer spending
In times of high inflation
businesses often find they are better off in nominal terms due to higher sales associated with high inflationary environments
Inflation uncertainty ______ the risk of investing in financial assets and undermines the credibility of the domestic currency and economy
increases
Increases in oil costs…
effect transportation and energy costs that effect virtually every business
What is hedging activity?
- 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
What are two basic competitive strategies?
- Cost leadership
- Product / service differentiation
What are key analysis questions?
- 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?
What are factors to consider when analyzing a company?
- Know the Firm’s Products
- Know the Industry Competition
- Know the Technology
- Know the Firm’s Knowledge Base
- Know the Management
What are peer groups?
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
