Certified Valuation Analyst CVA Economic and Industry Analysis 3 — Questions and Answers
Question 1: How does an inverted yield curve typically signal relevance to a valuation analyst?
- It can foreshadow recession, warranting more conservative projections (Correct answer)
- It guarantees imminent inflation
- It eliminates the equity risk premium
- It only affects bond, not equity, valuations
Correct answer: It can foreshadow recession, warranting more conservative projections
An inverted yield curve has historically preceded recessions, suggesting more conservative forecasting.
Question 2: Which factor would MOST increase the company-specific risk premium in building up a discount rate?
- Heavy customer concentration in one client (Correct answer)
- A diversified, recurring revenue base
- Low debt and strong liquidity
- Operating in a growing industry
Correct answer: Heavy customer concentration in one client
Dependence on a single major customer raises company-specific risk and thus the premium.
Question 3: Real GDP growth differs from nominal GDP growth in that real GDP:
- Is adjusted for inflation (Correct answer)
- Includes only government spending
- Excludes consumer spending
- Is always higher than nominal
Correct answer: Is adjusted for inflation
Real GDP is inflation-adjusted, isolating actual output changes from price changes.
Question 4: Which industry analysis tool examines Political, Economic, Social, Technological, Environmental, and Legal factors?
- PESTEL analysis (Correct answer)
- Porter's Five Forces
- SWOT matrix
- DuPont analysis
Correct answer: PESTEL analysis
PESTEL examines macro-environmental Political, Economic, Social, Technological, Environmental, and Legal factors.
Question 5: A high industry barrier to entry generally affects valuation by:
- Supporting more sustainable margins for incumbents (Correct answer)
- Reducing the value of established firms
- Increasing the threat of new competitors
- Lowering the terminal growth assumption
Correct answer: Supporting more sustainable margins for incumbents
High entry barriers protect incumbents' profitability, supporting more sustainable margins and higher value.
Question 6: When local economic conditions diverge from national trends, the analyst should:
- Weight regional data relevant to the subject company's market (Correct answer)
- Ignore local data in favor of national averages
- Use only the client's projections
- Apply a fixed 10% adjustment
Correct answer: Weight regional data relevant to the subject company's market
A subject company's value reflects its actual market, so relevant regional economic data should be weighted.
Question 7: Which metric best gauges consumer demand strength for a discretionary-goods industry?
- Consumer confidence and disposable personal income (Correct answer)
- The producer price index alone
- The federal deficit
- Corporate bond default rates
Correct answer: Consumer confidence and disposable personal income
Consumer confidence and disposable income strongly predict spending on discretionary goods.
Certified Valuation Analyst CVA Economic and Industry Analysis 3
How does an inverted yield curve typically signal relevance to a valuation analyst?