A technical analyst with Smith, Kleen & Beetchnutty is examining the automobile parts industry to determine whether its current earnings multiple is justified. In his analysis, this technical analyst examines the underlying components of the earnings multiplier, the dividend payout ratio, the required rate of return, and the expected growth rate, and the relationship between the values of these components for the automobile parts industry and the overall market. Which of the following best characterizes this method of estimating an earnings multiplier for an industry? Choose the best answer.
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A. B. C. D. E. F.Explanation
The method profiled in this example is "microanalysis," which is one of two methods for estimating the earnings multiplier of an industry. Microanalysis involves examining the variables underlying theearnings multiplier - the required rate of return, the growth forecast, and the dividend payout ratio. In microanalysis, these variables are examined for the industry and then compare them with the values of these variables for the entire market.
The microanalysis method is contrasted by the macroanalysis method, which involves examining the historical relationship between the earnings multiplier of an industry with that of the overall market. Macroanalysis forecasts often use a time series.
When examining and forecasting an industry earnings multiplier, it is recommended that both macroanalysis and microanalysis be used. This should produce a more reliable answer. "Simulation analysis," and "scenario analysis," are methods of measuring stand-alone risk, and the "Porter Method" is used to measure industry competition.