CFA Level 1: Willow Corp. and Vision Inc. Analysis | Growth Company, Growth Stock, Speculative Company, Speculative Stock

Willow Corp. and Vision Inc. Analysis

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Question

Brad Kit, CFA, is analyzing the broadcasting industry. Kit has narrowed his analysis to Willow Corp. and Vision Inc.

Willow Corp. is a media company with a diversified group of leading TV, newspaper, and cable news operations. Revenues and earnings have grown slightly over the past ten years. The company's long-term debt to capital ratio is 40%. During the last recession, the company's earnings remained flat with the prior year. Still,

Kit believes that Willow Corp. will have positive earnings surprises over the next several quarters, due to several new programs that have been hugely successful.

Vision Inc.'s operations are located in emerging markets with a high degree of political and regulatory risk. However, the TV, radio, and internet operations have the potential for extraordinary returns. Vision's stock is trading at 30 times next year's earnings and five times book value.

A client asks Kit whether Willow Corp. is a growth company or growth stock and whether Vision Inc. is a speculative company or speculative stock. Kit's most appropriate response would be that:

Answers

Explanations

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A. B. C.

C

Based on the information provided, Brad Kit, CFA, is analyzing two companies: Willow Corp. and Vision Inc. He has some insights into their operations and financial metrics. Let's analyze each company individually and then determine the appropriate response.

  1. Willow Corp.:
  • Willow Corp. is a media company with diversified operations in TV, newspaper, and cable news.
  • Revenues and earnings have grown slightly over the past ten years.
  • The company's long-term debt to capital ratio is 40%, which indicates a moderate level of debt.
  • During the last recession, the company's earnings remained flat with the prior year.
  • Brad Kit believes that Willow Corp. will have positive earnings surprises over the next several quarters due to several new successful programs.

Based on these points, we can determine the following:

  • Willow Corp. is a growth company because it has shown slight revenue and earnings growth over the past ten years.
  • However, it is not explicitly mentioned whether Willow Corp.'s stock is trading at a high multiple or has high market expectations. Therefore, we cannot definitively conclude that Willow Corp. is a growth stock.
  1. Vision Inc.:
  • Vision Inc.'s operations are located in emerging markets, which implies a high degree of political and regulatory risk.
  • The company operates in TV, radio, and internet sectors, which have the potential for extraordinary returns.
  • Vision Inc.'s stock is trading at 30 times next year's earnings, indicating a high valuation.
  • The stock is also trading at five times book value, suggesting a premium relative to the company's assets.

Based on these points, we can determine the following:

  • Vision Inc. is a speculative company because it operates in emerging markets with high political and regulatory risk.
  • Vision Inc.'s stock is trading at a high multiple (30 times next year's earnings) and a high price-to-book ratio (five times book value), which suggests a speculative investment.

Given the analysis of each company, Brad Kit's most appropriate response would be:

B. Willow Corp. is a growth company and Vision Inc. is a speculative stock.

This response reflects that Willow Corp. is considered a growth company due to its historical revenue and earnings growth, while Vision Inc. is considered a speculative stock due to its operations in emerging markets and the high valuation of its stock.

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