Chap12 - Chapter 12 - Macroeconomic and Industry Analysis...

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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 companies within an industry or sector that has been identified as likely to perform well. A bottom-up approach typically emphasizes fundamental analysis of individual company stocks, and is largely based on the belief that undervalued stocks will perform well regardless of the prospects for the industry or the broader economy. The major advantage of the top-down approach is that it provides a structured approach to incorporating the impact of economic and financial variables, at every level, in to analysis of a company’s stock. One would expect, for example, that prospects for a particular industry are highly dependent on broader economic variables. Similarly, the performance of an individual company’s stock is likely to be greatly affected by the prospects for the industry in which the company operates. 2. The yield curve, by definition, incorporates future interest rates. As such, it reflects future expectations and is a leading indicator. 3. Stalwarts. They tend to be in noncyclical industries that are relatively unaffected by recessions. 4. A supply shock 5. Financial leverage increases the sensitivity of profits in the business cycle since it is a fixed cost. Firms with high fixed costs are said to have high operating leverage, as small swings in business conditions can have large impacts on profitability. 6. Asset play 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. Contraction is the period from peak to trough. Expansion is the period from trough to peak. 8. 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. 9. (1+n) = (1+r)x(1+i)… (1+.05) = (1+r)x(1+.03)… solving for r = .0194 10. DOL = 1 + (7/4) = 2.75 12-1
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Chapter 12 - Macroeconomic and Industry Analysis 11. This exercise is left to the student 12. Expansionary (i.e., looser) monetary policy to lower interest rates would help to stimulate investment and expenditures on consumer durables. Expansionary fiscal policy (i.e., lower taxes, higher government spending, increased welfare transfers) would directly stimulate aggregate demand. 13. A depreciating dollar makes imported cars more expensive and American cars cheaper to foreign consumers. This should benefit the U.S. auto industry. 14.
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Chap12 - Chapter 12 - Macroeconomic and Industry Analysis...

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