ABV Economic & Industry Analysis Flashcards
6 cards from real ABV practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 ABV Economic & Industry Analysis flashcards as text
Which of the following sources is commonly used by ABV practitioners to obtain industry financial ratios for benchmarking?
Answer: Risk Management Association (RMA) Annual Statement Studies
RMA Annual Statement Studies provide industry-level balance sheet and income statement ratios widely used in business valuation benchmarking.
What does 'market concentration' measure in an industry analysis performed as part of a business valuation?
Answer: The degree to which a small number of firms control most of the industry's output or revenue
Market concentration indicates competitive intensity; highly concentrated industries often have fewer competitors and higher barriers to entry.
How does an industry in the 'decline' stage of its life cycle typically affect the valuation of a business operating within it?
Answer: It reduces value because future growth prospects are limited and risk is elevated
Declining industries face shrinking demand and pricing pressure, which limits future cash flow growth and increases business risk.
Which economic concept best describes a situation where an industry's barriers to entry are very low?
Answer: Contestable market
A contestable market is one where low barriers allow new entrants to compete freely, limiting incumbent firms' pricing power and long-run profitability.
Why is an industry risk premium sometimes added to the discount rate in a business valuation build-up model?
Answer: To adjust for risks inherent to the specific industry that are not captured by the broad equity risk premium
Certain industries (e.g., healthcare, oil & gas) carry systemic risks beyond general equity risk, warranting a premium adjustment to the discount rate.
In performing economic analysis for a valuation, what is a 'normalization adjustment' for a cyclical company?
Answer: Adjusting revenues and earnings to reflect mid-cycle or through-the-cycle performance rather than peak or trough conditions
For cyclical companies, mid-cycle normalization removes temporary distortions caused by economic booms or recessions to reflect sustainable earning power.