CFA 49: Intro to Company & Industry Analysis

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

B is correct. As displayed in Exhibit 4, the alcoholic beverage industry is concentrated and possesses strong pricing power.

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: decrease. increase. not change.

B is correct. As their educational level increases, workers are able to perform more skilled tasks, earn higher wages, and as a result, have more income left for discretionary expenditures.

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

C is correct. A sector rotation strategy is conducted by investors wishing to time investment in industries through an analysis of fundamentals and/or business-cycle conditions.

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

C is correct. A slow pace of product innovation often means that customers prefer to stay with suppliers they know, implying stable market shares.

Which of the following is not one of Porter's five forces? Intensity of rivalry. Bargaining power of suppliers. Threat of government intervention.

C is correct. Although the threat of government intervention may be considered an element of some of Porter's five forces, it is not one of the listed forces.

Which of the following industries is most likely to be considered to have the lowest barriers to entry? Oil services. Confections and candy. Branded pharmaceuticals.

A is correct. The oil services industry has medium barriers to entry because a company with a high level of technological innovation could obtain a niche market in a specific area of expertise.

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

C is correct. The relatively few members of the industry generally try to avoid price competition.

With regard to forming a company's peer group, which of the following statements is not correct? Comments from the management of the company about competitors are generally not used when selecting the peer group. 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. Comparing the company's performance measures with those for a potential peer-group company is of limited value when the companies are exposed to different stages of the business cycle.

A is correct because it is a false statement. Reviewing the annual report to find management's discussion about the competitive environment and specific competitors is a suggested step in the process of constructing a peer group.

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

A is correct. An industry that has high barriers to entry generally requires substantial physical capital and/or financial investment. With weak pricing power in the industry, finding a buyer for excess capacity (i.e., to exit the industry) may be difficult.

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

A is correct. Companies with low cost strategies must be able to invest in productivity-improving equipment and finance that investment at a low cost of capital. Market share and pricing depend on whether the strategy is pursued defensively or offensively.

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

A is correct. Seeking economies of scale would tend to reduce per-unit costs and increase profit.

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

A is correct. The Russell system uses three tiers, whereas the other two systems are based on four tiers or levels.

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

A is correct. The cost structure is an appropriate element when analyzing the supply of the product, but analysis of demand relies on the product's differentiating characteristics and the customers' needs and wants.

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

B is correct. Business-cycle sensitivity falls on a continuum and is not a discrete "either-or" phenomenon.

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

B is correct. Constructing a peer group is a subjective process, and a logical starting point is to begin with a commercially available classification system. This system will identify a group of companies that may have properties comparable to the business activity of interest.

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

B is correct. Determination of a company's competitive environment depends on understanding its industry.

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

B is correct. Personal care products are classified as consumer staples in the "Description of Representative Sectors."

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

B is correct. The company could be in more than one peer group depending on the demand drivers for the business segments, although the multiple business segments may make it difficult to classify the company.

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

B is correct. The industry life-cycle model shows how demand evolves through time as an industry passes from the embryonic stage through the stage of decline.

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

B is correct. Vision typically deteriorates at advanced ages. An increased number of older adults implies more eyewear products will be purchased.

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

C is correct. Capacity increases in providing legal services would not involve several factors that would be important to the other two industries, including the need for substantial fixed capital investments or, in the case of a restaurant, outfitting rental or purchased space. These requirements would tend to slow down, respectively, steel production and restaurant expansion.

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

C is correct. Commercial systems are generally updated more frequently than government systems, and include only publicly traded for-profit companies.

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

C is correct. Customers' flexibility as to when they purchase the product makes the product more sensitive to the business cycle.

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

C is correct. Economic profit is earned and value created for shareholders when the company earns returns above the company's cost of capital.

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

C is correct. For the automobile industry, the high capital requirements and other elements mentioned in the reading provide high barriers to entry, and recognition that auto factories are generally only of use for manufacturing cars implies a high barrier to exit.

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

C is correct. Tactical asset allocation involves timing investments in asset classes and does not make use of industry analysis.

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

C is correct. The corporate profile would provide an understanding of these elements.

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

C is correct. The embryonic stage is characterized by slow growth and high prices.

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

C is correct. The growth phase is not likely to experience price wars because expanding industry demand provides companies the opportunity to grow even without increasing market share. When industry growth is stagnant, companies may only be able to grow by increasing market share, e.g., by engaging in price competition.

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

C is correct. Varying conditions of recession or expansion around the world would affect the comparisons of companies with sales in different regions of the world.

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

C is correct. With short lead times, industry capacity can be rapidly increased to satisfy demand, but it may also lead to overcapacity and lower profits.