NISM Series XV Chapter 7: Company Analysis – Business and Governance Practice Questions

Question 1

For an external observer like an equity analyst, which approach to conducting a SWOT analysis is deemed more suitable according to the text?

Accepted Answer

Identifying opportunities and threats first, then strengths and weaknesses.. The text states, 'However, for an external observer like an equity analyst, the second is more suitable. Further, in a typical E-I-C framework, as the analysts study the external conditions first and then study the company, the second approach falls more in the logical order of things.' The second approach refers to identifying O&T first

Question 2

What does 'pricing power' primarily refer to for a company?

Accepted Answer

Its ability to independently determine and charge the price of its products.. The text defines pricing power as 'a company’s ability to independently determine and charge the price of its products.'

Question 3

Which of the following is NOT explicitly listed as a company-specific question an analyst must find answers to in Section 7.1?

Accepted Answer

What is the current market share of the company's main product?. The listed questions in section 7.1 (i)-(vii) include business model, capability, and governance structure. Market share is not explicitly listed as one of these primary company-specific questions

Question 4

In a SWOT analysis framework, which two components are considered internal to the company?

Accepted Answer

Strengths and Weaknesses.. The text clarifies, 'Strengths and weakness are internal to the company while opportunities and threats emanate from external conditions.'

Question 5

Which of the following is identified as a challenge for an external analyst in accurately performing a SWOT analysis?

Accepted Answer

Companies intentionally hiding financial woes through creative accounting.. The text explicitly mentions a challenge for outsiders: 'if a company has been intentionally hiding their financial woes through creative accounting, it is not easy for outsiders to identify such a fraud.'

Question 6

What does 'pricing power' primarily refer to for a company, according to Section 7.3?

Accepted Answer

Its ability to independently determine and charge the price of its products. Section 7.3 defines pricing power as 'a company’s ability to independently determine and charge the price of its products.'

Question 7

What is considered the starting point of qualitative research on any business, according to Section 7.2?

Accepted Answer

Understanding what the company does and how it does it. Section 7.2 states: 'Accordingly, starting point of qualitative research on any business must be questions such as: • What does company do and how does it do?'

Question 8

According to the text, which of the following is a correctly matched sector-specific evaluation parameter?

Accepted Answer

Hotels sector: Average room tariffs.. The text lists: 'For the retail sector, foot falls and same store sales (SSS) are important parameters, whereas for banking it is Net Interest Income (NII)/ Net Interest Margin (NIM). For telecom, it is Average Revenue Per User (ARPU) and for hotels, it is average room tariffs etc.'

Question 9

For the banking sector, which of the following is highlighted as an important parameter for evaluation, according to the text?

Accepted Answer

Net Interest Income (NII) / Net Interest Margin (NIM). The text explicitly states, 'for banking it is Net Interest Income (NII)/ Net Interest Margin (NIM).'

Question 10

In the context of SWOT analysis for an equity analyst, which of the following is considered an internal factor to the company?

Accepted Answer

Weaknesses that make the company vulnerable to external events.. Section 7.5 clearly states, 'Strengths and weakness are internal to the company while opportunities and threats emanate from external conditions.'

Question 11

What was Warren Buffet's view on wide diversification, as quoted in the text?

Accepted Answer

It is primarily required when investors lack understanding of their investments.. The text directly quotes Warren Buffet: 'Wide diversification is only required when investors do not understand what they are doing.'

Question 12

An equity analyst is evaluating a company's ability to compete by keeping prices low. According to the text, for this strategy to be sustainable, what primary condition must the company possess?

Accepted Answer

A low-cost advantage compared to its competitors.. Section 7.4 (ii) Competitive pricing states: 'However, competing by keeping the prices low is sustainable only if the company has a low-cost advantage. Otherwise, competitors would be able to mimic the company’s strategy and reduce their price as well.'

Question 13

What significant limitation for an outsider analyst conducting a SWOT analysis is highlighted in the text?

Accepted Answer

Difficulty in identifying undisclosed government influence or hidden financial irregularities.. The text notes: 'For instance, no company would publicly disclose the clout they have in the government or the strength of their lobby. Similarly, if a company has been intentionally hiding their financial woes through creative accounting, it is not easy for outsiders to identify such a fraud.'

Question 14

According to the text, what is the primary role of company analysis in fundamental research?

Accepted Answer

To evaluate company-specific factors that significantly influence its individual performance.. The text states, 'Although, these external factors affect every company in the industry, how an individual company performs also depend a lot on company specific factors.'

Question 15

While pricing power is often driven by industry factors, which of the following is NOT listed as a company-specific factor that can position a company differently from its peers in terms of pricing power?

Accepted Answer

The overall competition intensity in the industry.. The text states, 'Most often pricing power is driven by industry factors that affect all companies in the industry. These factors include the competition intensity in the industry, the price elasticity of the product, and the level of commoditisation of the product.' It then lists brand affinity, natural leadership position, and low-cost base as 'company specific factors'

Question 16

Which of the following is considered a company-specific factor that contributes to its pricing power, as per the text?

Accepted Answer

A natural leadership position in the industry.. Section 7.3 states that 'Company-specific factors include its natural leadership position in the industry, brand affinity among customers and its cost base.' The other options are listed as industry factors

Question 17

Management guru Dr. Garry Hamel is quoted in the text regarding the nature of competition in the marketplace. What does he state is the primary competition?

Accepted Answer

Between the Business Models of the competing companies. The text quotes Dr. Garry Hamel: 'Competition in the marketplace is not between products and services but between the Business Models of the competing companies.'

Question 18

For an external observer like an equity analyst, which approach to SWOT analysis is considered more suitable and aligns with the typical E-I-C framework?

Accepted Answer

Identifying opportunities and threats first, then strengths and weaknesses.. Section 7.5 states: 'However, for an external observer like an equity analyst, the second [approach] is more suitable.' The second approach is to 'identify the opportunities and threats first and then identify what strengths of the company will help them exploit the opportunities and what weakness make them vulnerable to the external threats.'

Question 19

What is considered the starting point of qualitative research on any business, according to the provided text?

Accepted Answer

Understanding what the company does, how it does it, and who its customers are.. The text explicitly states: 'Accordingly, starting point of qualitative research on any business must be questions such as: • What does company do and how does it do? • Who are the customers and why do customers buy those products and services?'

Question 20

For an external observer like an equity analyst, which approach to SWOT analysis is considered more suitable and aligns with the E-I-C framework?

Accepted Answer

Identify opportunities and threats first, then strengths and weaknesses.. The text states, 'However, for an external observer like an equity analyst, the second [identifying opportunities and threats first] is more suitable. Further, in a typical E-I-C framework, as the analysts study the external conditions first and then study the company, the second approach falls more in the logical order of things.'

Question 21

After an analyst understands the economy and industry, which of the following is NOT listed as a company-specific question they must find answers to?

Accepted Answer

What is the overall macro-economic growth rate?. The text lists company-specific questions an analyst must find answers to after understanding macro-economic factors and industry-specific factors. Overall macro-economic growth rate is an external factor, not a company-specific question to be answered at this stage

Question 22

In a SWOT analysis framework, which two components are considered internal to the company?

Accepted Answer

Strengths and Weaknesses. The text states, 'Strengths and weakness are internal to the company while opportunities and threats emanate from external conditions.'

Question 23

According to the text, for a company to sustainably compete by keeping its prices low, what critical advantage must it possess?

Accepted Answer

A low-cost advantage. Section 7.4 (ii) states: 'However, competing by keeping the prices low is sustainable only if the company has a low-cost advantage.'

Question 24

When identifying weaknesses, the text advises analysts to primarily focus on those weaknesses that are:

Accepted Answer

Directly related to the company's opportunities and threats.. The text explicitly states: 'While identifying strengths and weakness, analyst should focus on those strengths or weaknesses that are related to the opportunities and threats.'

Question 25

Which of the following is identified as a company-specific factor that can position a company differently from its peers in terms of pricing power?

Accepted Answer

Brand affinity among customers. The text lists 'brand affinity among customers' as a company-specific factor, while competition intensity, price elasticity, and commoditisation are listed as industry factors

Question 26

According to the text, which of the following is NOT listed as one of the three primary areas for a company to differentiate itself from competitors?

Accepted Answer

Extensive use of celebrity endorsements in advertising.. The text states differentiating factors can be categorized into three areas: '(i) Differentiation in product features (ii) Competitive pricing driven by operational efficiency (iii) Better execution.' Celebrity endorsements are not mentioned as a primary category

Question 27

According to the text, what is a primary reason for conducting company analysis in fundamental research?

Accepted Answer

To understand how an individual company performs based on company-specific factors.. The text states, 'Although, these external factors affect every company in the industry, how an individual company performs also depend a lot on company specific factors.'

Question 28

According to Chapter 7, investing in shares involves careful and thorough analysis of a company's business. However, a company is considered a micro unit within what broader context?

Accepted Answer

Its industry and the overall economy. The text states: 'However, a company is only a micro unit in its industry and in turn in the economy.'

Question 29

According to the text, what is a company considered within its industry and the overall economy?

Accepted Answer

A micro unit. The text states, 'However, a company is only a micro unit in its industry and in turn in the economy.'

Question 30

For the banking sector, which of the following is identified as an important parameter for evaluation in the provided text?

Accepted Answer

Net Interest Income (NII)/Net Interest Margin (NIM). The text explicitly states: 'whereas for banking it is Net Interest Income (NII)/ Net Interest Margin (NIM).'

Question 31

In the SWOT analysis framework, what do 'Strengths' and 'Weaknesses' primarily refer to?

Accepted Answer

Internal capabilities and issues of the company. Section 7.5 states: 'Strengths and weakness are internal to the company while opportunities and threats emanate from external conditions.'

Question 32

Which of the following is considered a starting point for qualitative research on any business, according to the text?

Accepted Answer

Understanding what the company does and how it does it.. The text states, 'starting point of qualitative research on any business must be questions such as: • What does company do and how does it do?'

Question 33

Which of the following statements about understanding a company's business model is explicitly supported by successful fund managers, as per the text?

Accepted Answer

One must invest only in firms where one understands the business.. The text explicitly quotes, 'Almost all successful fund managers are never tired of repeating this thought that one must invest only is such firms where one understands the business.'

Question 34

Which of the following is identified as a company-specific factor that contributes to a company's pricing power?

Accepted Answer

A natural leadership position held by the company in its industry.. The text lists 'natural leadership position in the industry, brand affinity among customers and its cost base' as company-specific factors for pricing power. The other options are industry factors

Question 35

According to the text, for competitive pricing to be sustainable, what key advantage must a company possess?

Accepted Answer

A low-cost advantage compared to competitors.. The text states, 'However, competing by keeping the prices low is sustainable only if the company has a low-cost advantage.'

Ch.7: Company Analysis – Business and Governance

What You Will Learn in This Chapter

Multiple Choice Questions (35)

Case-Based Questions (2 sets)

Most candidates guess their way through XV.
BullWiser makes you prove it.

Ch.7: Company Analysis – Business and Governance

What You Will Learn in This Chapter

Multiple Choice Questions (35)

Case-Based Questions (2 sets)

Most candidates guess their way through XV.BullWiser makes you prove it.

Most candidates guess their way through XV.
BullWiser makes you prove it.