Title Reading 40 Introduction to Industry and Company Analysis - Answers.pdf ✅

Question #1 of 45 Question ID: 1462892 According to typical commercial industry classification systems, which of the following industries is classified in the consumer discretionary sector? A) Apparel. B) Tobacco. C) Internet services. Explanation Apparel is classified as consumer discretionary, tobacco as consumer staples, and internet services as technology. (Module 40.1, LOS 40.d) Question #2 of 45 Question ID: 1458253 The competitive forces identified by Michael Porter include: A) power of existing competitors and threat of entry. B) rivalry among existing competitors and power of buyers. C) threat of substitutes and rivalry among suppliers. Explanation Porter's five competitive forces are: (1) rivalry among existing competitors; (2) threat of entry; (3) threat of substitutes; (4) power of buyers; (5) power of suppliers. (Module 40.1, LOS 40.g) Question #3 of 45 Question ID: 1458258 Market share stability within an industry is least likely to result from a high level of: A) product innovation.
B) switching costs. C) barriers to entry. Explanation Frequent introductions of new products and innovations tend to make firms' market shares within an industry less stable. High barriers to entry into the industry and high switching costs for customers to change to a competing product both contribute to market share stability. (Module 40.2, LOS 40.h) Question #4 of 45 Question ID: 1458252 Economic profits are most likely to be earned by firms in an industry that is characterized by: A) high barriers to entry and low power of buyers. B) low threat of substitutes and high rivalry among existing competitors. C) high power of suppliers and low threat of entry. Explanation High barriers to entry (low threat of entry) and low power of buyers both increase the potential for economic profits within an industry. The five forces that shape industry competition are rivalry among existing competitors, threat of entry, threat of substitutes, power of buyers, and power of suppliers. The stronger any of these forces are within an industry, the less potential that industry has to generate (or continue to earn) economic profits. (Module 40.1, LOS 40.g) Question #5 of 45 Question ID: 1458233 Commercial industry classification systems such as the Global Industry Classification Standard (GICS) typically classify firms according to their: A) correlations of historical returns. B) principal business activities. C) sensitivity to business cycles. Explanation
Commercial providers of industry classification systems such as the GICS classify firms according to principal business activity, such as Consumer Staples, Financial Services, or Health Care. (Module 40.1, LOS 40.b) Question #6 of 45 Question ID: 1458238 Starr Company is an asset management firm. Thomas Company is a manufacturer of apparel. Assuming these firms are representative of their industry groups, how are they best classified with regard to their sensitivity to the business cycle? Starr Thomas A) Cyclical Cyclical B) Non-cyclical Non-cyclical C) Cyclical Non-cyclical Explanation Asset management firms are classified in the financial services industry group. Apparel manufacturers are classified in the consumer discretionary industry group. Financial services and consumer discretionary are cyclical industry groups. (Module 40.1, LOS 40.c) Question #7 of 45 Question ID: 1458246 A manager tells a research analyst, "A thorough industry analysis should use more than one approach to estimate industry variables," and "An analyst should not compare his valuations to those of other analysts." Which of these two statements is (are) CORRECT? A) Both of these statements are accurate. B) Neither of these statements is accurate. C) Only one of these statements is accurate. Explanation
The first statement is accurate. When analyzing an industry, an analyst should use different approaches and scenarios when estimating industry variables. The second statement is inaccurate. Comparing one's own forecasts with those of other analysts can be useful for confirming the soundness of the analysis and for identifying industries that are potentially overvalued or undervalued by the consensus view. (Module 40.1, LOS 40.f) Question #8 of 45 Question ID: 1458251 The threat of substitutes is most likely to be low for a firm that: A) produces a commodity product in an industry with significant unused capacity. B) produces a differentiated product with high switching costs. C) operates in a fragmented market with little unused capacity. Explanation The threat of competition from substitute products is likely to be low for a firm that produces a differentiated product with high switching costs. Unused capacity and low industry concentration (a fragmented market) tend to intensify rivalry among industry competitors but are not directly related to the threat of substitutes. (Module 40.1, LOS 40.g) Question #9 of 45 Question ID: 1458255 A firm is most likely to have pricing power if it operates in an industry characterized by: A) high concentration, undercapacity, and high market share stability. B) high concentration, undercapacity, and low market share stability. C) low concentration, overcapacity, and high market share stability. Explanation Firms in highly concentrated industries are more likely to have pricing power than firms in fragmented industries. Firms in industries with tight capacity constraints are more likely to have pricing power than firms in industries with excess capacity. High market share stability is indicative of pricing power because competition is likely less intensive. (Module 40.2, LOS 40.h)