Chapter 4: Q.3B (page 396)
Which one of the following firms would be described as having below-average sensitivity to the state of the economy?
a. An asset play firm
b. A cyclical firm
c. A defensive firm
d. A stalwart firm
Answer
d. A Stalwart firm
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Choose an industry and identify the factors that will determine its performance in the next three years. What is your forecast for performance in that period?
Deployment Specialists pays a current (annual) dividend of $1 and is expected to grow at 20% for two years and then at 4% thereafter. If the required return for Deployment Specialists is 8.5%, what is the intrinsic value of Deployment Specialists stock?
The Crusty Pie Co., which specializes in apple turnovers, has a return on sales higher than the industry average, yet its ROA is the same as the industry average. How can you explain this?
Universal Auto is a large multinational corporation headquartered in the United States.
For segment reporting purposes, the company is engaged in two businesses: production of motor vehicles and information processing services.
The motor vehicle business is by far the larger of Universal’s two segments. It consists mainly of domestic United States passenger car production, but it also includes small truck manufacturing operations in the United States and passenger car production in other countries. This segment of Universal has had weak operating results for the past several years, including a large loss in 2012. Although the company does not reveal the operating results of its domestic passenger car segments, that part of Universal’s business is generally believed to be primarily responsible for the weak performance of its motor vehicle segment.
Idata, the information processing services segment of Universal, was started by Universal about 15 years ago. This business has shown strong, steady growth that has been entirely internal: No acquisitions have been made.
An excerpt from a research report on Universal prepared by Paul Adams, a CFA candidate, states: “Based on our assumption that Universal will be able to increase prices significantly on U.S. passenger cars in 2013, we project a multibillion-dollar profit improvement . . .”
a. Discuss the concept of an industrial life cycle by describing each of its four phases.
b. Identify where each of Universal’s two primary businesses—passenger cars and information processing—is in such a cycle.
c. Discuss how product pricing should differ between Universal’s two businesses, based on the location of each in the industrial life cycle.
As a securities analyst, you have been asked to review a valuation of a closely held business, Wigwam Autoparts Heaven, Inc. (WAH), prepared by the Red Rocks Group (RRG). You are to give an opinion on the valuation and support your opinion by analyzing each part of the valuation. WAH’s sole business is automotive parts retailing. The RRG valuation includes a section called “Analysis of the Retail Auto Parts Industry,” based completely on the data in Table 12.7 and the following additional information:
• WAH and its principal competitors each operated more than 150 stores at year-end 2010.
• The average number of stores operated per company engaged in the retail auto parts industry is 5.3.
• The major customer base for auto parts sold in retail stores consists of young owners of old vehicles. These owners do their own automotive maintenance out of economic necessity.
a. One of RRG’s conclusions is that the retail auto parts industry as a whole is in the maturity stage of the industry life cycle. Discuss three relevant items of data from Table 12.7 that support this conclusion.
b. Another RRG conclusion is that WAH and its principal competitors are in the consolidation stage of their life cycle. Cite three items from Table 12.7 that suggest this conclusion. How can WAH be in a consolidation stage while its industry is in a maturity stage?
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