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CFA Level II Chartered Financial Analyst Questions 70–74 (page: 36)

Bryan Galloway is a strategist for JS Investments, a small money management firm. His goal is to analyze industries to determine whether there is justification for over- or under-weighting. His supervisor, Robyn Black, CFA, has asked that he document the process he uses to make his recommendations. However, just to be sure that Galloway understands industry analysis. Black asks him to provide examples of supply and demand analysis. Galloway makes the following two statements to prove that he understands the issue:

Statement 1: In analyzing supply in the tire and rubber industry, it is clear that the sale of each additional automobile will result in the sale of approximately two winter tires.
Statement 2: In analyzing demand for services in the healthcare industry, for every 100 new hospital beds required, 20 additional doctors are needed.

Black is not entirely confident in Galloway's abilities to analyze various industries, but decides to allow him to continue with his analysis.
Four of the largest holdings for JS Investments are a tobacco company, a soda drink company, an oil company, and a cable TV company. Black is worried that government intervention will have a serious impact on future growth for these companies and asks Galloway to further research each of the industries involved. However, just to make sure Galloway can handle this project. Black first asks him to review the basics of industry analysis.

In reviewing the factors affecting pricing considerations, Galloway concludes that all of the following are of direct importance:
Factor 1: Price changes in key supply inputs.
Factor 2: Product segmentation.
Factor 3: Ease of entry into the industry.
Factor 4: Degree of industry concentration.

Galloway also makes the following statements about the characteristics of the phases of the industrial life cycle:

Characteristic 1: Participants compete for market share in a stable industry.
Characteristic 2: Changing tastes have an important impact on the industry.
Characteristic 3: It is not clear that a product will be accepted in the industry.
Characteristic 4: Proper execution of strategy is critical.

Each of the phases is represented by one characteristic.
For which of the following global industries would U.S. government involvement most likely represent an example of a negative external influence?

Bryan Galloway is a strategist for JS Investments, a small money management firm. His goal is to analyze industries to determine whether there is justification for over- or under-weighting. His supervisor, Robyn Black, CFA, has asked that he document the process he uses to make his recommendations. However, just to be sure that Galloway understands industry analysis. Black asks him to provide examples of supply and demand analysis. Galloway makes the following two statements to prove that he understands the issue:

Statement 1: In analyzing supply in the tire and rubber industry, it is clear that the sale of each additional automobile will result in the sale of approximately two winter tires.
Statement 2: In analyzing demand for services in the healthcare industry, for every 100 new hospital beds required, 20 additional doctors are needed.

Black is not entirely confident in Galloway's abilities to analyze various industries, but decides to allow him to continue with his analysis.

Four of the largest holdings for JS Investments are a tobacco company, a soda drink company, an oil company, and a cable TV company. Black is worried that government intervention will have a serious impact on future growth for these companies and asks Galloway to further research each of the industries involved. However, just to make sure Galloway can handle this project. Black first asks him to review the basics of industry analysis.

In reviewing the factors affecting pricing considerations, Galloway concludes that all of the following are of direct importance:
Factor 1: Price changes in key supply inputs.
Factor 2: Product segmentation.
Factor 3: Ease of entry into the industry.
Factor 4: Degree of industry concentration.

Galloway also makes the following statements about the characteristics of the phases of the industrial life cycle:
Characteristic 1: Participants compete for market share in a stable industry.
Characteristic 2: Changing tastes have an important impact on the industry.
Characteristic 3: It is not clear that a product will be accepted in the industry.
Characteristic 4: Proper execution of strategy is critical.

Each of the phases is represented by one characteristic.
Did Galloway correctly identity the factors that directly affect pricing considerations?

Bryan Galloway is a strategist for JS Investments, a small money management firm. His goal is to analyze industries to determine whether there is justification for over- or under-weighting. His supervisor, Robyn Black, CFA, has asked that he document the process he uses to make his recommendations. However, just to be sure that Galloway understands industry analysis. Black asks him to provide examples of supply and demand analysis. Galloway makes the following two statements to prove that he understands the issue:

Statement 1: In analyzing supply in the tire and rubber industry, it is clear that the sale of each additional automobile will result in the sale of approximately two winter tires.
Statement 2: In analyzing demand for services in the healthcare industry, for every 100 new hospital beds required, 20 additional doctors are needed.

Black is not entirely confident in Galloway's abilities to analyze various industries, but decides to allow him to continue with his analysis.
Four of the largest holdings for JS Investments are a tobacco company, a soda drink company, an oil company, and a cable TV company. Black is worried that government intervention will have a serious impact on future growth for these companies and asks Galloway to further research each of the industries involved. However, just to make sure Galloway can handle this project. Black first asks him to review the basics of industry analysis.

In reviewing the factors affecting pricing considerations, Galloway concludes that all of the following are of direct importance:
Factor 1: Price changes in key supply inputs.
Factor 2: Product segmentation.
Factor 3: Ease of entry into the industry.
Factor 4: Degree of industry concentration.

Galloway also makes the following statements about the characteristics of the phases of the industrial life cycle:
Characteristic 1: Participants compete for market share in a stable industry.
Characteristic 2: Changing tastes have an important impact on the industry.
Characteristic 3: It is not clear that a product will be accepted in the industry.
Characteristic 4: Proper execution of strategy is critical.
Each of the phases is represented by one characteristic.

What life cycle phase most appropriately reflects Characteristic 1 and Characteristic 3?

Amie Lear, CFA, is a quantitative analyst employed by a brokerage firm. She has been assigned by her supervisor to cover a number of different equity and debt investments. One of the investments is Taylor, Inc. (Taylor), a manufacturer of a wide range of children's toys. Based on her extensive analysis, she determines that her expected return on the stock, given Taylor's risks, is 10%. In applying the capital asset pricing model (CAPM), the result is a 12% rate of return.

For her analysis of the returns of Devon, Inc. (Devon), a manufacturer of high-end sports apparel, Lear intends to use the Fama-French model (FFM). Devon is a small-cap growth stock that has traded at a low market-to-book value in recent years. Lear's analysis has provided a wealth of quantitative information to consider. The return on a value-weighted market index minus the risk- free rate is 5.5%, the small-cap return premium is 3.1%, the value return premium is 2.2%, and the liquidity premium is 3.3%. The risk-free rate is 3.4%. The market, size, relative value, and liquidity betas for Devon are 0.7, -0.3, 1.4, and 1.2, respectively. In estimating the appropriate equity risk premium, Lear has chosen to use the Gordon growth model.

Lear's assistant, Doug Saunders, presents her with a report on macroeconomic multifactor models that includes the following two statements:
Statement 1: Business cycle risk represents the unexpected change in the difference between the return of risky corporate bonds and government bonds.
Statement 2: Confidence risk represents the unexpected change in the level of real business activity.

Lear is also attempting to determine the most appropriate method for determining the required return for Densmore, Inc. (Densmore), a closely held company that is considering a debt issue within the next year. The company has not previously issued debt securities to the public, relying instead on bank financing. She realizes that there are a number of models to consider, including the CAPM, multifactor models, and build-up models.
Based on Lear's analysis, Taylor's stock is most likely to be:

Amie Lear, CFA, is a quantitative analyst employed by a brokerage firm. She has been assigned by her supervisor to cover a number of different equity and debt investments. One of the investments is Taylor, Inc. (Taylor), a manufacturer of a wide range of children's toys. Based on her extensive analysis, she determines that her expected return on the stock, given Taylor's risks, is 10%. In applying the capital asset pricing model (CAPM), the result is a 12% rate of return.

For her analysis of the returns of Devon, Inc. (Devon), a manufacturer of high-end sports apparel, Lear intends to use the Fama-French model (FFM). Devon is a small-cap growth stock that has traded at a low market-to-book value in recent years. Lear's analysis has provided a wealth of quantitative information to consider. The return on a value-weighted market index minus the risk- free rate is 5.5%, the small-cap return premium is 3.1%, the value return premium is 2.2%, and the liquidity premium is 3.3%. The risk-free rate is 3.4%. The market, size, relative value, and liquidity betas for Devon are 0.7, -0.3, 1.4, and 1.2, respectively. In estimating the appropriate equity risk premium, Lear has chosen to use the Gordon growth model.

Lear's assistant, Doug Saunders, presents her with a report on macroeconomic multifactor models that includes the following two statements:

Statement 1: Business cycle risk represents the unexpected change in the difference between the return of risky corporate bonds and government bonds.
Statement 2: Confidence risk represents the unexpected change in the level of real business activity.

Lear is also attempting to determine the most appropriate method for determining the required return for Densmore, Inc. (Densmore), a closely held company that is considering a debt issue within the next year. The company has not previously issued debt securities to the public, relying instead on bank financing. She realizes that there are a number of models to consider, including the CAPM, multifactor models, and build-up models.
According to the FFM, the estimate of the required return for Devon is closest to: