Chapter 12 – Macroeconomic and Industry Analysis
CHAPTER 12
MACROECONOMIC AND INDUSTRY ANALYSIS
1. A top-down approach to security valuation begins with an analysis of the global and
domestic economy. Analysts who follow a top-down approach then narrow their
attention to an industry or sector likely to perform well, given the expected
performance of the broader economy. Finally, the analysis focuses on specific
3. c. A defensive firm. Defensive firms and industries have below-average sensitivity to
the state of the economy.
5. a. Financial leverage increases the sensitivity of profits in the business cycle since
the interest payments have to be made regardless of the business cycle.
6. d. Asset play. Some of the valuable assets of the company are not currently reflected in
the present value.
7. A peak is the transition from the end of an expansion to the start of a contraction. A
trough occurs at the bottom of a recession just as the economy enters a recovery.
8. a. Monetary policy is expansive and fiscal policy is expansive. This is consistent with a
10. Companies tend to pay very low, if any, dividends early in their business life cycle
since these firms need to reinvest as much capital as possible in order to grow.
11. 1+ Real Interest Rate = 1+ Nominal Interest Rate
1+ Inflation Rate
12. ATech’s operating leverage, as measured by Degree of Operating Leverage (DOL),
equals 1 + Fixed Costs
Profits = 1 + 7
13. This exercise is left to the student.
14. Expansionary (i.e., looser) monetary policy to lower interest rates would help to
15. A depreciating dollar makes imported cars more expensive and American cars cheaper
to foreign consumers. This should benefit the U.S. auto industry.
16. a. Gold Mining. Gold is traditionally viewed as a hedge against inflation.
Expansionary monetary policy may lead to increased inflation, and could thus
17. a. The human workers process will have higher profits in a recession.
b. The robotics process firm will perform better in a boom due to higher fixed
18. Supply side economists believe that a reduction in income tax rates will make workers
19.
Deep recession
Health care (non-cyclical)
Superheated economy
Steel production (cyclical)
Healthy expansion
Housing construction (cyclical, but interest rate sensitive)
Stagflation
Gold mining (counter cyclical)
20. a. General Autos. Pharmaceutical purchases are less discretionary than automobile
21.
a.
Oil well equipment
in easily-developed oil fields)
b.
Computer hardware
Consolidation stage
Computer software
Consolidation stage
d.
Genetic engineering
Start-up stage
Railroads
Relative decline
Decline (environmental pressures, decline
22. The index of consumer expectations is a useful leading economic indicator because, if
23. Labor cost per unit of output is a lagging indicator because wages typically start rising
well into an economic expansion. At the beginning of an expansion, there is
24. a. Because of the very short average maturity (30 days), the rate of return on the
money market fund will be affected only slightly by changes in interest rates.
The fund might be a good place to “park” cash if you forecast an increase in
25. The expiration of the patent means that General Weedkillers will soon face
considerably greater competition from its competitors. We would expect prices and
26. Equity prices are positively correlated with job creation or longer work weeks, as each
27. a. Stock prices are one of the leading indicators. One possible explanation is that stock
prices anticipate future interest rates, corporate earnings and dividends. Another
29. a. Foreign exchange rates can significantly affect the competitiveness and profitability
for a given industry. For industries that derive a significant proportion of sales via
30. Determinants of buyer power include buyer concentration, buyer volume, buyer
information, available substitutes, switching costs, brand identity, and product
31. a. Product differentiation can be based on the product itself, the method of delivery, or
the marketing approach.
32. A firm with a strategic planning process not guided by their generic competitive
strategy usually makes one or more of the following mistakes:
1. The strategic plan is a list of unrelated action items that does not lead to a sustainable
competitive advantage.
3. Business units are placed into categories such as build, hold, and harvest; with
4. The firm focuses on market share as a measure of competitive position, failing to
realize that market share is the result and not the cause of a sustainable competitive
33.
Sales (mil) 2 1
Price per unit 200 200
Var Cost per unit -140 -140
Chapter 12 – Macroeconomic and Industry Analysis
CFA 1 Answer:
a. Relevant data items from the table that support the conclusion that the retail
auto parts industry as a whole is in the maturity phase of the industry life cycle
are:
• The population of 18 to 29-year olds, a major customer base for the
industry, is gradually declining.
• The number of households with income less than $40,000, another
b. Relevant items of data from the table that support the conclusion that Wigwam
Autoparts Heaven, Inc. (WAH) and its major competitors are in the
consolidation stage of their life cycle are:
• Sales of retail auto parts companies with 100 or more stores have been
growing rapidly and at an increasing rate.
Because of industry fragmentation (i.e., most of the market share is distributed among
many companies with only a few stores), the retail auto parts industry apparently is
undergoing marketing innovation and consolidation. The industry is moving toward the
“category killer” format, in which a few major companies control large market shares
CFA 2 Answer:
Chapter 12 – Macroeconomic and Industry Analysis
a. The concept of an industrial life cycle refers to the tendency of most industries
to go through various stages of growth. The rate of growth, the competitive
environment, profit margins and pricing strategies tend to shift as an industry
moves from one stage to the next, although it is difficult to pinpoint exactly
when one stage has ended and the next begun.
b. The passenger car business in the United States has probably entered the final
stage in the industrial life cycle because normalized growth is quite low. The
c. Cars: In the final phases of the life cycle, demand tends to be price sensitive.
Thus, Universal can not raise prices without losing volume. Moreover, given the
Chapter 12 – Macroeconomic and Industry Analysis
CFA 3 Answer:
a. A basic premise of the business cycle approach to investing is that stock prices
anticipate fluctuations in the business cycle. For example, there is evidence that
stock prices tend to move about six months ahead of the economy. In fact, stock
prices are a leading indicator for the economy.
b. Based on the business cycle approach to investment timing, the ideal time to
invest in a cyclical stock like a passenger car company would be just before the
CFA 4 Answer:
a.
• The industry-wide ROE is leveling off, indicating that the industry may be
approaching a later stage of the life cycle.
• Average P/E ratios are declining, suggesting that investors are becoming
Chapter 12 – Macroeconomic and Industry Analysis
b.
• Industry growth rate is still forecast at 10 − 15%, higher than would be true
of a mature industry.
• Non-U.S. markets are still untapped, and some firms are now entering these
CFA 5
Answer:
a. (4) Government deficits are planned during the economic recessions, and