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CHAPTER 17: MACROECONOMIC AND INDUSTRY ANALYSIS
PROBLEM SETS
1. Expansionary (looser) monetary policy to lower interest rates would stimulate both
2. A depreciating dollar makes imported cars more expensive and American cars less
expensive to foreign consumers. This should benefit the U.S. auto industry.
3. This exercise is left to the student; answers will vary. Successful students will likely
4. 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
5. Firms with greater sensitivity to business cycles are in industries that produce
durable consumer goods or capital goods. Consumers of durable goods (e.g.,
Chapter 17 – Macroeconomic and Industry Analysis
6. a. Gold Mining. Gold traditionally is viewed as a hedge against inflation.
Expansionary monetary policy may lead to increased inflation and thus could
7. Supply-side economists believe that a reduction in income tax rates will make
workers more willing to work at current or even slightly lower (gross-of-tax) wages.
Such an effect ought to mitigate cost pressures on the inflation rate.
8. a. When both fiscal and monetary policies are expansive, the yield curve is
9. a. When wealth is redistributed through the government’s tax policy, economic
10. a. The robotics process entails higher fixed costs and lower variable (labor)
costs. Therefore, this firm will perform better in a boom and worse in a
11. a. Housing construction (cyclical but interest-rate sensitive): (iii) Healthy expansion
12. a. Oil well equipment: Relative decline (Environmental pressures, decline in
easily developed new oil fields)
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13. a. General Autos. Pharmaceuticals are less of a discretionary purchase than
14. The index of consumer expectations is a useful leading economic indicator because,
15. Labor cost per unit is a useful lagging indicator because wages typically start rising
only well into an economic expansion. At the beginning of an expansion, there is
16. The expiration of the patent means that General Weedkillers will soon face
considerably greater competition from its competitors. We would expect prices and
17. a. Expected profit = Revenues – Fixed costs – Variable costs
= $120,000 – $30,000 – [(1/3) $120,000] = $50,000
Chapter 17 – Macroeconomic and Industry Analysis
18. Equity prices are positively correlated with job creation or longer work weeks, as
19. a. Stock prices are one of the leading indicators. One possible explanation is that
stock prices anticipate future interest rates, corporate earnings, and dividends.
20. a. Industrial production is a coincident indicator; the others are leading.
21. b. If historical returns are used, the arithmetic and geometric means of returns are
available. The geometric mean is preferred for multiperiod horizons to observe
22. a. Foreign exchange rates can significantly affect the competitiveness and
profitability for a given industry. For industries that derive a significant proportion
23. Determinants of buyer power include buyer concentration, buyer volume, buyer
information, available substitutes, switching costs, brand identity, and product
24. a. Product differentiation can be based on the product itself, the method of delivery,
or the marketing approach.
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25. A firm with a strategic planning process not guided by its generic competitive
strategy usually makes one or more of the following mistakes:
1. The strategic plan is a list of unrelated action items that do not lead to a
sustainable competitive advantage.
2. Price and cost forecasts are based on current market conditions and fail
to take into account how industry structure will influence future long-
CFA PROBLEMS
1. a. Lowering reserve requirements would allow banks to lend out a higher
fraction of deposits and thus increase the money supply.
2. a. Expansionary monetary policy is likely to increase the inflation rate, either
because it may overstimulate the economy or ultimately because the end result
of more money in the economy is higher prices.
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3. 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 generally difficult to identify
precisely when one stage has ended and the next begun.
Product pricing, profitability, and industry competitive structure often vary by
stage. Thus, for example, the first stage usually encompasses high product
prices, high costs (R&D, marketing, etc.) and a (temporary) monopolistic
stage in the industrial life cycle because normalized growth is quite low. The
information processing business, on the other hand, is undoubtedly earlier in
the cycle. Depending on whether or not growth is still accelerating, it is either
in the second or third stage.
c. Cars: In the final stages of the life cycle, demand tends to be price sensitive.
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4. a. A basic premise of the business cycle approach to investment timing 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.
Over the course of a business cycle, this approach to investing would work
b. Based on the business cycle approach to investment timing, the ideal time to
invest in a cyclical stock such as a passenger car company would be just
5. a. • The industrywide 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
less optimistic about growth prospects.
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6. a. Relevant data from the table supporting the conclusion that the retail auto
parts industry as a whole is in the maturity stage of the industry life cycle are:
• The population of 18–29 year olds, a major customer base for the industry, is
gradually declining.
• The number of households with income less than $35,000, another important
b. (i) Relevant data from the table supporting the conclusion that Wigwam
Autoparts Heaven, Inc. (WAH) and its principal competitors are in the
consolidation stage of their life cycle are:
• Sales growth of retail autoparts companies with 100 or more stores
have been growing rapidly and at an increasing rate.
7. a. (iii)