Jorge Porres
August 18, 2013
Investments
Keiser University
Week 3 Essays

1. Industry Life Cycle: Discuss the industry life cycle, how this concept can be used by security analysts, and the limitations of this concept for security analysis. The industry life cycle is made up of five stages:
1. Pioneer phase: This face is characterized by the high cost of production and the low demand of the product by the market. Mostly made up of start-ups.
2. Growth phase: When sales start to grow thanks to little competition.
3. Mature Growth phase: Companies begin to be affected by competition and as a result profit margins begin to diminish.
4. Stabilization /Maturity phase: this is typically the longest phase an industry will go thru, it is still affected by competition and starts growing by an average of the now fully created industry.
5. Deceleration / Decline phase: the falls in demand do to innovation in other products from other companies or industries. This life cycle can be effective to security analysis or to investors because they know when it is wise to invest, knowing that a company will grow, so will its market cap. It is not always 100% effective do that it is difficult to know when innovation will strike and one may not be prepared for the deceleration or decline phase. 2. P/E Ratio: The price/earnings ratio, or multiplier approach, may be used for stock valuation. Explain this process and describe how the "multiplier" varies from the one available in the stock market quotation pages. The price earnings ratio used for stock valuation should be the predicted price/earnings ratio. Meaning, the ratio of the current price of the stock divided by the expected earnings per share for the coming year. Getting a ration of expected earnings, because valuations should be based on future earnings not on past earnings. Such a forecasted price/earnings ratio is published in Value Line. The investor can multiply the value of that published ratio by the forecasted earnings per share (also published by VL), the forecasted earnings per share numbers cancel out; the result being the intrinsic value of the stock described as:
PO/e1 X e1 = PO.

3. Financial Statements: In an increasingly globalized investment environment, comparability problems become even greater. Discuss some of the problems for the investor who wishes to have an internationally diversified portfolio. Most of the problems that investors face when trying to have an internationally diverse portfolio arise from the different regulations that companies face in different countries. For example some companies may not require having certain accounting standards such as the general accounting principles required by the companies in the USA. For example, straight-line depreciation process is not permitted in some countries. Other accounting problems may arise because of the way the country manages taxes, P/E ratios, reserves and consolidations. Another problem may arise from unstable and volatile governments that may create embargos or cut production or restrict corporate activities without previous announcements. Some places have drastic government changes creating high political risk. Another problem may be the translation of financial documents from one language to another.

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