Nigel French, an analyst at Taurus Investment Management, is analyzing Archway Technol- ogies, a manufacturer of luxury electronic auto equipment, at the request of his supervisor, Lukas Wright. French is asked to evaluate Archway's profitability over the past five years rel- ative to its two main competitors, which are located in different countries with significantly different tax structures. French begins by assessing Archway's competitive position within the luxury electronic auto equipment industry using Porter's five forces framework. A summary of French's industry analysis is presented in Exhibit 3. EXHIBIT 3 Analysis of Luxury Electronic Auto Equipment Industry Using Porter's Five Forces Framework Force Threat of substitutes Rivalry Bargaining power of suppliers Bargaining power of buyers Threat of new entrants Factors to consider Customer switching costs are high Archway holds 60% of world market share; each of its two main competitors holds 15% Primary inputs are considered basic commodities, and there are a large number of suppliers Luxury electronic auto equipment is very specialized (non-standardized) High fixed costs to enter industry French notes that for the year just ended (2014), Archway's cost of goods sold was 30% of sales. To forecast Archway's income statement for 2015, French assumes that all companies in the industry will experience an inflation rate of 8% on the cost of goods sold. Exhibit 4 shows French's forecasts relating to Archway's price and volume changes. EXHIBIT 4 Archway's 2015 Forecasted Price and Volume Changes 5.00% -3.00% Average price increase per unit Volume growth After putting together income statement projections for Archway, French forecasts Arch- way's balance sheet items; he uses Archway's historical efficiency ratios to forecast the compa- ny's working capital accounts. Based on his financial forecast for Archway, French estimates a terminal value using a valuation multiple based on the company's average price-to-earnings multiple (P/E) over the past five years. Wright discusses with French how the terminal value estimate is sensitive to key assumptions about the company's future prospects. Wright asks French: "What change in the calculation of the terminal value would you make if a technological develop- ment that would adversely affect Archway was forecast to occur sometime beyond your financial forecast horizon?" 7. Which return metric should French use to assess Archway's five-year historic performance relative to its competitors? A. Return on equity B. Return on invested capital C. Return on capital employed 8. Based on the current competitive landscape presented in Exhibit 3, French should con- clude that Archway's ability to: A. pass along price increases is high. B. demand lower input prices from suppliers is low. C. generate above-average returns on invested capital is low. 9. Based on the current competitive landscape presented in Exhibit 3, Archway's operating profit margins over the forecast horizon are least likely to: A. decrease. B. remain constant. C. increase. 10. Based on Exhibit 4, Archway's forecasted gross profit margin for 2015 is closest to: A. 62.7%. B. 67.0%. C. 69.1%. 11. French's approach to forecasting Archway's working capital accounts would be most likely classified as a: A. hybrid approach. B. top-down approach. C. bottom-up approach. 12. The most appropriate response to Wright's question about the technological development is to: A. increase the required return. B. decrease the price-to-earnings multiple. C. decrease the perpetual growth rate. Nigel French, an analyst at Taurus Investment Management, is analyzing Archway Technol- ogies, a manufacturer of luxury electronic auto equipment, at the request of his supervisor, Lukas Wright. French is asked to evaluate Archway's profitability over the past five years rel- ative to its two main competitors, which are located in different countries with significantly different tax structures. French begins by assessing Archway's competitive position within the luxury electronic auto equipment industry using Porter's five forces framework. A summary of French's industry analysis is presented in Exhibit 3. EXHIBIT 3 Analysis of Luxury Electronic Auto Equipment Industry Using Porter's Five Forces Framework Force Threat of substitutes Rivalry Bargaining power of suppliers Bargaining power of buyers Threat of new entrants Factors to consider Customer switching costs are high Archway holds 60% of world market share; each of its two main competitors holds 15% Primary inputs are considered basic commodities, and there are a large number of suppliers Luxury electronic auto equipment is very specialized (non-standardized) High fixed costs to enter industry French notes that for the year just ended (2014), Archway's cost of goods sold was 30% of sales. To forecast Archway's income statement for 2015, French assumes that all companies in the industry will experience an inflation rate of 8% on the cost of goods sold. Exhibit 4 shows French's forecasts relating to Archway's price and volume changes. EXHIBIT 4 Archway's 2015 Forecasted Price and Volume Changes 5.00% -3.00% Average price increase per unit Volume growth After putting together income statement projections for Archway, French forecasts Arch- way's balance sheet items; he uses Archway's historical efficiency ratios to forecast the compa- ny's working capital accounts. Based on his financial forecast for Archway, French estimates a terminal value using a valuation multiple based on the company's average price-to-earnings multiple (P/E) over the past five years. Wright discusses with French how the terminal value estimate is sensitive to key assumptions about the company's future prospects. Wright asks French: "What change in the calculation of the terminal value would you make if a technological develop- ment that would adversely affect Archway was forecast to occur sometime beyond your financial forecast horizon?" 7. Which return metric should French use to assess Archway's five-year historic performance relative to its competitors? A. Return on equity B. Return on invested capital C. Return on capital employed 8. Based on the current competitive landscape presented in Exhibit 3, French should con- clude that Archway's ability to: A. pass along price increases is high. B. demand lower input prices from suppliers is low. C. generate above-average returns on invested capital is low. 9. Based on the current competitive landscape presented in Exhibit 3, Archway's operating profit margins over the forecast horizon are least likely to: A. decrease. B. remain constant. C. increase. 10. Based on Exhibit 4, Archway's forecasted gross profit margin for 2015 is closest to: A. 62.7%. B. 67.0%. C. 69.1%. 11. French's approach to forecasting Archway's working capital accounts would be most likely classified as a: A. hybrid approach. B. top-down approach. C. bottom-up approach. 12. The most appropriate response to Wright's question about the technological development is to: A. increase the required return. B. decrease the price-to-earnings multiple. C. decrease the perpetual growth rate. Nigel French, an analyst at Taurus Investment Management, is analyzing Archway Technol- ogies, a manufacturer of luxury electronic auto equipment, at the request of his supervisor, Lukas Wright. French is asked to evaluate Archway's profitability over the past five years rel- ative to its two main competitors, which are located in different countries with significantly different tax structures. French begins by assessing Archway's competitive position within the luxury electronic auto equipment industry using Porter's five forces framework. A summary of French's industry analysis is presented in Exhibit 3. EXHIBIT 3 Analysis of Luxury Electronic Auto Equipment Industry Using Porter's Five Forces Framework Force Threat of substitutes Rivalry Bargaining power of suppliers Bargaining power of buyers Threat of new entrants Factors to consider Customer switching costs are high Archway holds 60% of world market share; each of its two main competitors holds 15% Primary inputs are considered basic commodities, and there are a large number of suppliers Luxury electronic auto equipment is very specialized (non-standardized) High fixed costs to enter industry French notes that for the year just ended (2014), Archway's cost of goods sold was 30% of sales. To forecast Archway's income statement for 2015, French assumes that all companies in the industry will experience an inflation rate of 8% on the cost of goods sold. Exhibit 4 shows French's forecasts relating to Archway's price and volume changes. EXHIBIT 4 Archway's 2015 Forecasted Price and Volume Changes 5.00% -3.00% Average price increase per unit Volume growth After putting together income statement projections for Archway, French forecasts Arch- way's balance sheet items; he uses Archway's historical efficiency ratios to forecast the compa- ny's working capital accounts. Based on his financial forecast for Archway, French estimates a terminal value using a valuation multiple based on the company's average price-to-earnings multiple (P/E) over the past five years. Wright discusses with French how the terminal value estimate is sensitive to key assumptions about the company's future prospects. Wright asks French: "What change in the calculation of the terminal value would you make if a technological develop- ment that would adversely affect Archway was forecast to occur sometime beyond your financial forecast horizon?" 7. Which return metric should French use to assess Archway's five-year historic performance relative to its competitors? A. Return on equity B. Return on invested capital C. Return on capital employed 8. Based on the current competitive landscape presented in Exhibit 3, French should con- clude that Archway's ability to: A. pass along price increases is high. B. demand lower input prices from suppliers is low. C. generate above-average returns on invested capital is low. 9. Based on the current competitive landscape presented in Exhibit 3, Archway's operating profit margins over the forecast horizon are least likely to: A. decrease. B. remain constant. C. increase. 10. Based on Exhibit 4, Archway's forecasted gross profit margin for 2015 is closest to: A. 62.7%. B. 67.0%. C. 69.1%. 11. French's approach to forecasting Archway's working capital accounts would be most likely classified as a: A. hybrid approach. B. top-down approach. C. bottom-up approach. 12. The most appropriate response to Wright's question about the technological development is to: A. increase the required return. B. decrease the price-to-earnings multiple. C. decrease the perpetual growth rate.