Economic and Industry Analysis
Core concepts
The top-down framework links the macroeconomy to the industry to the company. Macro factors: GDP growth, interest rates, inflation, employment, consumer confidence, and credit conditions. Industry factors: life-cycle stage (emerging, growth, mature, declining), competitive structure (Porter's five forces), regulatory environment, technology disruption, cyclicality, and international exposure. Company factors: market position, cost structure, customer base, and management depth.
Industry analysis supports the growth assumptions and risk premia used in the income approach and the selection of guideline companies in the market approach. It also informs the long-term sustainable growth rate-which should not exceed long-run nominal GDP growth for a going concern.
Traps
- Using a company-specific growth rate that outpaces the industry indefinitely in the terminal value.
- Selecting guideline companies from a different industry or size profile.
- Ignoring cyclicality when normalizing a peak or trough year.
- Confusing industry risk with company-specific risk-both may apply, but they are distinct adjustments.
- Overweighting a single macro indicator.
Worked rule of thumb
Terminal growth ≤ long-run nominal GDP growth. If nominal GDP grows ~4% (real plus inflation), a terminal growth rate of 2–3% is defensible; 7% invites challenge. For cyclical firms, base normalized earnings on a multi-year average rather than the latest peak or trough.
Exam strategy
Questions often test whether a growth or risk assumption is internally consistent with the industry evidence presented. Check the terminal value first-it is where inconsistencies hide.