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Macroeconomics and Industry
Analysis, BKM Ch 17
Zvi Wiener
tel: 02-588-3049
Fall-02
[email protected]
http://pluto.mscc.huji.ac.il/~mswiener/zvi.html
Investments
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Framework of Analysis
Fundamental Analysis
Approach to Fundamental Analysis:
Domestic and global economic analysis
Industry analysis
Company analysis
Why use the top-down approach?
Zvi Wiener
BKM Ch 17
slide 2
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Global Economic Considerations
Performance in countries and regions is highly
variable.
Political risk
Exchange rate risk
Sales
Profits
Stock returns
Zvi Wiener
BKM Ch 17
slide 3
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Key Economic Variables
Gross domestic product
Unemployment rates
Interest rates & inflation
International measures
Consumer sentiment
Zvi Wiener
BKM Ch 17
slide 4
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Federal Government Policy
Fiscal Policy - government spending and
taxing actions.
Direct policy
Slowly implemented
Zvi Wiener
BKM Ch 17
slide 5
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Federal Government Policy
(cont’d)
Monetary Policy - manipulation of the money
supply to influence economic activity.
Initial & feedback effects
Tools of monetary policy
Open market operations
Discount rate
Reserve requirements
Zvi Wiener
BKM Ch 17
slide 6
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Demand Shocks
Demand shock - an event that affects demand
for goods and services in the economy.
Tax rate cut
Increases in government spending
Zvi Wiener
BKM Ch 17
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Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Supply Shocks
Supply shock - an event that influences
production capacity or production costs.
Commodity price changes
Educational level of economic participants
Zvi Wiener
BKM Ch 17
slide 8
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Business Cycles
Business Cycle
Peak
Trough
Industry relationship to business cycles
Cyclical
Defensive
Zvi Wiener
BKM Ch 17
slide 9
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
NBER Cyclical Indicators:
Leading
Leading Indicators - tend to rise and fall in
advance of the economy.
Examples:
Avg. weekly hours of production workers
Stock Prices
Zvi Wiener
BKM Ch 17
slide 10
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
NBER Cyclical Indicators:
Coincident
Coincident Indicators - indicators that tend to
change directly with the economy.
Examples:
Industrial production
Manufacturing and trade sales
Zvi Wiener
BKM Ch 17
slide 11
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
NBER Cyclical Indicators:
Lagging
Lagging Indicators - indicators that tend to
follow the lag economic performance.
Examples:
Ratio of trade inventories to sales
Ratio of consumer installment credit outstanding to
personal income
Zvi Wiener
BKM Ch 17
slide 12
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Industry Analysis
Sensitivity to business cycles
Factors affecting sensitivity of earnings to
business cycles:
Sensitivity of sales of the firm’s product to the
business cycles
Operating leverage
Financial leverage
Industry life cycles
Zvi Wiener
BKM Ch 17
slide 13
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Industry Life Cycles
Stage
Sales Growth
Start-up
Rapid & Increasing
Consolidation
Stable
Maturity
Slowing
Relative Decline
Minimal or Negative
Zvi Wiener
BKM Ch 17
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Home Assignment
Required:
• Read chapter 17 in BKM
• problem 18 (5th ed) (see next slide).
• closely follow financial news!
Zvi Wiener
BKM Ch 17
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problem 18
th
(5
ed)
Your business plan for your proposed start-up firm envisions first-year revenues of
$120,000 fixed costs of $30,000 and variable costs equal to one-third of revenue.
A. What are expected profits based on these expectation?
B. What is the degree of operating leverage based on the estimate of fixed costs and
expected profits?
C. If sales are 10% below expectation, what will be the decrease in profits?
D. Show that the percentage decrease in profits equals DOL times the 10% drop in
sales.
E. Based on the DOL, what is the largest percentage shortfall in sales relative to
original expectations that the firm can sustain before profits turn
negative? What are break-even sales at this point?
F. Confirm that your answer to (E) is correct by calculating profits at the brakeeven level of sales.
Zvi Wiener
BKM Ch 17
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