Certified Valuation Analyst CVA Economic and Industry Analysis 2 — Questions and Answers
Question 1: Under the income approach, which economic indicator most directly informs the long-term growth rate assumed in a Gordon Growth terminal value?
- Expected long-run nominal GDP growth (Correct answer)
- The current federal funds rate
- Last quarter's unemployment rate
- The subject company's prior-year revenue
Correct answer: Expected long-run nominal GDP growth
A sustainable terminal growth rate is typically anchored to expected long-run nominal GDP growth, since no firm can outgrow the economy indefinitely.
Question 2: A rising 10-year Treasury yield, all else equal, has what effect on a business's value under a DCF model?
- Lowers value by raising the discount rate (Correct answer)
- Raises value by lowering the discount rate
- No effect because it is risk-free
- Raises value by increasing the equity risk premium
Correct answer: Lowers value by raising the discount rate
Higher risk-free rates increase the discount rate, reducing the present value of future cash flows.
Question 3: Which Porter's Five Forces element is most heightened when an industry has low switching costs and many comparable substitutes?
- Threat of substitutes (Correct answer)
- Barriers to entry from capital intensity
- Supplier bargaining power
- Government regulation
Correct answer: Threat of substitutes
Low switching costs and abundant comparable products directly raise the threat of substitutes.
Question 4: When analyzing a cyclical industry, why should an analyst normalize earnings over a full business cycle?
- To avoid over- or under-valuing based on a peak or trough year (Correct answer)
- To comply with GAAP revenue recognition
- To eliminate the need for a discount rate
- To convert nominal figures to real figures
Correct answer: To avoid over- or under-valuing based on a peak or trough year
Normalizing over a cycle prevents distortion from using an unrepresentative peak or trough year.
Question 5: Which source is generally considered the most authoritative for macroeconomic outlook data in a U.S. valuation report?
- Federal Reserve and Congressional Budget Office forecasts (Correct answer)
- The subject company's marketing brochures
- Anonymous online forums
- The client's verbal estimates
Correct answer: Federal Reserve and Congressional Budget Office forecasts
Federal Reserve and CBO publications are recognized authoritative sources for U.S. macroeconomic forecasts.
Question 6: An industry with high fixed costs and significant excess capacity is most likely to exhibit which competitive characteristic?
- Intense price competition and rivalry (Correct answer)
- High and stable profit margins
- Strong barriers to entry protecting incumbents
- Low sensitivity to demand changes
Correct answer: Intense price competition and rivalry
High fixed costs plus excess capacity drive firms to cut prices to fill capacity, intensifying rivalry.
Question 7: In industry life-cycle analysis, the 'maturity' stage is typically characterized by what?
- Slowing growth, market saturation, and margin pressure (Correct answer)
- Rapid revenue growth and easy market entry
- High R&D spending with no profits
- Accelerating new-customer adoption
Correct answer: Slowing growth, market saturation, and margin pressure
Maturity features saturated demand, slower growth, and competitive pressure on margins.
Certified Valuation Analyst CVA Economic and Industry Analysis 2
Under the income approach, which economic indicator most directly informs the long-term growth rate assumed in a Gordon Growth terminal value?