FINANCIAL STATEMENT MODELING
CERTIFICATION EXAM COMPLETE VERSION WITH
100 PERCENT CORRECT ANSWERS ALREADY
GRADED A+
◉ pricing power and bargain power of customers - low PP when the
bargaining power of customers is high
◉ pricing power, prospects for earnings growth, and threat of
entrants - PP is low when there is a high threat of entrants
prospects for earnings growth is low when there is a high threat of
entrants
◉ contrast vertically integrated companies and companies that use
commodities as their inputs - vertically integrated firms are
essentially their own suppliers thus they are less vulnerable to
changes in costs of inputs
companies that rely on commodities are sensitive to exchange rates
and inflation and deflation
◉ what is key to determine if a company is not vertically integrated
and does not hedge their input prices - one, how quickly they pass
on the increased prices of inputs to their customers
two, how it will affect sales volume and revenue
,◉ what are the factors that affect iput prices - weather, govt
regulation and taxation, tariffs, and the characteristics of input
prices
◉ what are two things a company may due (in the short run) when
an input price has risen - cut costs in other things like advertising
or use a substitute (oil to natural gas) for the time being
◉ the effects of increasing a product's price depends on - the
elasticity of demand for the product
◉ elastic demand - the % reduction in unit sales is greater than the
% increase in price, and it will decrease total sales revenue (NOT
GOOD, INELASTIC IS GOOD IT MEANS PRICING POWER)
◉ what happens if the dollar amount of the increase in cost per unit
is added to the product's price and unit sales do not actually
decrease - net operating profit will be the same, but gross margins,
operating margins, and net margins will fall
this is because the numerators do not change, but the sales in the
denominator does change (even if its the same amount of sales in
quantity, total revenue is greater because the product price is now
higher)
, ◉ what is the elasticity of demand most affected by - availability of
substitutes
◉ describe what happens when input prices for an industry increase
and then one firm is quick to increase their product prices - they will
experience the greatest decline in sales as compared to the other
firms that increase prices AFTER another firm has already done so
this is because they gain more market share once another firm has
raised their prices (people will flock to the lower priced firms)
◉ for the firm that waits to raise their prices in response to
increasing input prices in an industry - they will likely earn more
market share, but their gross margin will decline due to the rising
input costs without increasing product prices
◉ what is the effect on technological advancements for a company
and an industry - they will experience declining costs, and increase
profit margins (at least for early adopters)
and once the industry as a whole hops on, supply will increase and
so will unit sales (due to declining prices)
it can also disrupt an entire industry when substitutes come into
play or an entirely new product (tablets vs PCs)
CERTIFICATION EXAM COMPLETE VERSION WITH
100 PERCENT CORRECT ANSWERS ALREADY
GRADED A+
◉ pricing power and bargain power of customers - low PP when the
bargaining power of customers is high
◉ pricing power, prospects for earnings growth, and threat of
entrants - PP is low when there is a high threat of entrants
prospects for earnings growth is low when there is a high threat of
entrants
◉ contrast vertically integrated companies and companies that use
commodities as their inputs - vertically integrated firms are
essentially their own suppliers thus they are less vulnerable to
changes in costs of inputs
companies that rely on commodities are sensitive to exchange rates
and inflation and deflation
◉ what is key to determine if a company is not vertically integrated
and does not hedge their input prices - one, how quickly they pass
on the increased prices of inputs to their customers
two, how it will affect sales volume and revenue
,◉ what are the factors that affect iput prices - weather, govt
regulation and taxation, tariffs, and the characteristics of input
prices
◉ what are two things a company may due (in the short run) when
an input price has risen - cut costs in other things like advertising
or use a substitute (oil to natural gas) for the time being
◉ the effects of increasing a product's price depends on - the
elasticity of demand for the product
◉ elastic demand - the % reduction in unit sales is greater than the
% increase in price, and it will decrease total sales revenue (NOT
GOOD, INELASTIC IS GOOD IT MEANS PRICING POWER)
◉ what happens if the dollar amount of the increase in cost per unit
is added to the product's price and unit sales do not actually
decrease - net operating profit will be the same, but gross margins,
operating margins, and net margins will fall
this is because the numerators do not change, but the sales in the
denominator does change (even if its the same amount of sales in
quantity, total revenue is greater because the product price is now
higher)
, ◉ what is the elasticity of demand most affected by - availability of
substitutes
◉ describe what happens when input prices for an industry increase
and then one firm is quick to increase their product prices - they will
experience the greatest decline in sales as compared to the other
firms that increase prices AFTER another firm has already done so
this is because they gain more market share once another firm has
raised their prices (people will flock to the lower priced firms)
◉ for the firm that waits to raise their prices in response to
increasing input prices in an industry - they will likely earn more
market share, but their gross margin will decline due to the rising
input costs without increasing product prices
◉ what is the effect on technological advancements for a company
and an industry - they will experience declining costs, and increase
profit margins (at least for early adopters)
and once the industry as a whole hops on, supply will increase and
so will unit sales (due to declining prices)
it can also disrupt an entire industry when substitutes come into
play or an entirely new product (tablets vs PCs)
