Introduction to Industry and Company Analysis

In connection with this discussion, note that International Financial Reporting Standards and US GAAP require companies to disclose financial information about their operating segments (subject to certain qualifications). Such disclosures provide analysts with operational and financial information that can be helpful in peer-group determination.

Know

11. With regard to forming a company's peer group, which of the following statements is not correct? A. Comments from the management of the company about competitors are generally not used when selecting the peer group. B. The higher the proportion of revenue and operating profit of the peer company derived from business activities similar to the subject company, the more meaningful the comparison. C. Comparing the company's performance measures with those for a potential peer-group company is of limited value.

A. Comments from the management of the company about competitors are generally not used when selecting the peer group.

Which industry classification system uses a three-tier classification system? A. Russell Global Sectors. B. Industry Classification Benchmark. C. Global Industry Classification Standard.

A. Russell Global Sectors

Which of the following statements about the industry life-cycle model is least accurate? A. The model is more appropriately used during a period of rapid change than during a period of relative stability. B. External factors may cause some stages of the model to be longer or shorter than expected, and in certain cases, a stage may be skipped entirely. C. Not all companies in an industry will experience similar performance, and very profitable companies can exist in an industry with below-average profitability.

A. The model is more appropriately used during a period of rapid change than during a period of relative stability.

With respect to competitive strategy, a company with a successful cost leadership strategy is most likely characterized by: A. a low cost of capital. B. reduced market share. C. the ability to offer products at higher prices than competitors.

A. a low cost of capital.

When conducting a company analysis, the analysis of demand for a company's product is least likely to consider the: A. company's cost structure. B. motivations of the customer base. C. product's differentiating characteristics.

A. company's cost structure.

If the technology for an industry involves high fixed capital investment, then one way to seek higher profit growth is by pursuing: A. economies of scale. B. diseconomies of scale. C. removal of features that differentiate the product or service provided

A. economies of scale.

An industry with high barriers to entry and weak pricing power most likely has: A. high barriers to exit. B. stable market shares. C. significant numbers of issued patents.

A. high barriers to exit.

Which of the following is the most accurate statement? A statistical approach to grouping companies into industries: A. is based on historical correlations of the securities' returns. B. frequently produces industry groups whose composition is similar worldwide. C. emphasizes the descriptive statistics of industries consisting of companies producing similar products and/or services.

A. is based on historical correlations of the securities' returns.

Which of the following industries is most likely to be characterized as concentrated with strong pricing power? A. Asset management. B. Alcoholic beverages. C. Household and personal products.

B. Alcoholic beverages.

7. Which of the following is not a limitation of the cyclical/non-cyclical descriptive approach to classifying companies? A. A cyclical company may have a growth component in it. B. Business-cycle sensitivity is a discrete phenomenon rather than a continuous spectrum. C. A global company can experience economic expansion in one part of the world while experiencing recession in another part.

B. Business-cycle sensitivity is a discrete phenomenon rather than a continuous spectrum.

10. Which of the following statements about peer groups is most accurate? A. Constructing a peer group for a company follows a standardized process. B. Commercial industry classification systems often provide a starting point for constructing a peer group. C. A peer group is generally composed of all the companies in the most narrowly defined category used by the commercial industry classification system.

B. Commercial industry classification systems often provide a starting point for constructing a peer group.

In which sector would a manufacturer of personal care products be classified? A. Health care. B. Consumer staples. C. Consumer discretionary.

B. Consumer staples.

Which of the following information about a company would most likely depend on an industry analysis? The company's: A. dividend policy. B. competitive environment. C. trends in corporate expenses.

B. competitive environment.

When graphically depicting the life-cycle model for an industry as a curve, the variables on the axes are: A. price and time. B. demand and time. C. demand and stage of the life cycle.

B. demand and time.

16. A population that is rapidly aging would most likely cause the growth rate of the industry producing eye glasses and contact lenses to: A. decrease. B. increase. C. not change.

B. increase.

If over a long period of time a country's average level of educational accomplishment increases, this development would most likely lead to the country's amount of income spent on consumer discretionary goods to: A. decrease. B. increase. C. not change.

B. increase.

12. When selecting companies for inclusion in a peer group, a company operating in three different business segments would: A. be in only one peer group. B. possibly be in more than one peer group. C. not be included in any peer group.

B. possibly be in more than one peer group.

Which of the following is least likely to be accurately described as a cyclical company? A(n): A. automobile manufacturer. B. producer of breakfast cereals. C. apparel company producing the newest trendy clothes for teenage girls.

B. producer of breakfast cereals.

Which of the following statements about commercial and government industry classification systems is most accurate? A. Many commercial classification systems include private for-profit companies. B. Both commercial and government classification systems exclude not-for-profit companies. C. Commercial classification systems are generally updated more frequently than government classification systems.

C. Commercial classification systems are generally updated more frequently than government classification systems.

Which of the following life-cycle phases is typically characterized by high prices? A. Mature. B. Growth. C. Embryonic.

C. Embryonic.

In which of the following life-cycle phases are price wars most likely to be absent? A. Mature. B. Decline. C. Growth.

C. Growth.

22. Which of the following is most likely a characteristic of a concentrated industry? A. Infrequent, tacit coordination. B. Difficulty in monitoring other industry members. C. Industry members attempting to avoid competition on price.

C. Industry members attempting to avoid competition on price.

Which of the following companies most likely has the greatest ability to quickly increase its capacity? A. Restaurant. B. Steel producer. C. Legal services provider.

C. Legal services provider.

Which of the following factors would most likely be a limitation of applying business-cycle analysis to global industry analysis? A. Some industries are relatively insensitive to the business cycle. B. Correlations of security returns between different world markets are relatively low. C. One region or country of the world may experience recession while another region experiences expansion.

C. One region or country of the world may experience recession while another region experiences expansion.

Which of the following industry characteristics is generally least likely to produce high returns on capital? A. High barriers to entry B. High degree of concentration C. Short lead time to build new plants

C. Short lead time to build new plants

Which factor is most likely associated with stable market share? A. Low switching costs. B. Low barriers to entry. C. Slow pace of product innovation.

C. Slow pace of product innovation.

Which of the following is least likely to involve industry analysis? A. Sector rotation strategy. B. Top-down fundamental investing. C. Tactical asset allocation strategy.

C. Tactical asset allocation strategy:

Which of the following statements about company analysis is most accurate? A. The complexity of spreadsheet modeling ensures precise forecasts of financial statements. B. The interpretation of financial ratios should focus on comparing the company's results over time but not with competitors. C. The corporate profile would include a description of the company's business, investment activities, governance, and strengths and weaknesses.

C. The corporate profile would include a description of the company's business, investment activities, governance, and strengths and weaknesses.

Economic value is created for an industry's shareholders when the industry earns a return: A. below the cost of capital. B. equal to the cost of capital. C. above the cost of capital.

C. above the cost of capital.

An industry that most likely has both high barriers to entry and high barriers to exit is the: A. restaurant industry. B. advertising industry. C. automobile industry.

C. automobile industry.

An industry experiencing slow growth and high prices is best characterized as being in the: A. mature stage. B. shakeout stage. C. embryonic stage.

C. embryonic stage.

The GICS classification system classifies companies on the basis of a company's primary business activity as measured primarily by: A. assets. B. income. C. revenue.

C. revenue.

8. A company that is sensitive to the business cycle would most likely: A. not have growth opportunities. B. experience below-average fluctuation in demand. C. sell products that the customer can purchase at a later date if necessary.

C. sell products that the customer can purchase at a later date if necessary: Customers' flexibility as to when they purchase a product makes the product more sensitive to the business cycle

A sector rotation strategy involves investing in a sector by: A. making regular investments in it. B. investing in a pre-selected group of sectors on a rotating basis. C. timing investment to take advantage of business-cycle conditions.

C. timing investment to take advantage of business-cycle conditions.