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Chapter 12 Problem 2:
CFA Examination Level I: there has been considerable growth in recent years in the use of economics analysis in investments management. Further significant expansion may lie ahead as financial analysts develop greater skills in economic analysis and these analyses are integrated more into the investment decision-making process. The following questions address the use of economic analysis in the investment decision-making process:
(1) Differentiate among leading, lagging and coincident indicators of economic activity, and give an example of each.
(2) Indicate whether the leading indicators are one of the best tools for achieving above-average investment results. Briefly justify your conclusion.
b. Interest rate projections are used in investment managements for a variety of purposes. Identify three significant reasons why interest rate forecasts may be important in reaching investment conclusions.
c. Assume you are a fundamental research analyst following the automobile industry for a large brokerage firm. Identify and briefly explain the relevance of three major economic time series, economic indicators, or economic data items that would be significant to automotive industry and company research.
You are given the following estimated per share data related to the S&P Industrial Index for the year 2010:
Interest expense $28.00
You are also informed that the estimated operating profit margin is 0.16 and the tax rate is 32 percent.
a. Compute the estimated EPS for 2010.
b. Assume that a member of the research committee for your firm feels that it is important to consider a ranger of operating profit margin (OPM) estimates. Therefore, you are asked to derive both optimistic and pessimistic EPS estimates using 0.15 and 0.17 for the OPM and holding everything else constant.
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