Investment Analysis (FIN 383) Fall Homework 8

Transcription

1 Investment Analysis (FIN 383) Fall 2009 Homework 8 Instructions: please read carefully You should show your work how to get the answer for each calculation question to get full credit The due date is Thu, Dec 10, Late homework will not be graded. Name(s): Student ID

2 1. At what stage of industry life cycle a company would face an influx of competition? a. Start-up b. Consolidation c. Maturity d. Relative decline 1. c 2. is an example of a defensive industry. a. Food producers b. Auto manufacturers c. Both A and B are examples. d. Neither A nor B is an example. 2. a 3. Companies in the maturity state of the industry life cycle are sometimes referred to as. a. falling stars b. bargains c. turnarounds d. cash cows 3. d 4. Which of the following will affect the sensitivity of a firm's earnings to the business cycle? a. Operating leverage. b. Dividend policy. c. Tax liabilities. d. None of the above will. 4. a 5. According to the section rotation analysis, investors should invest more heavily in when the economy enters a contraction stage. a. cyclical industry b. defensive industry c. Either industry. d. Both industries. 5. b 6. Which of the following is a characteristic of the start-up stage of the industry life cycle? a. New technology. b. Many competitors. c. Slow growth. d. Dominant industry leader. 6. a 7. Which of the following is true about industry analysis? a. When the economy is booming, rates of return across industry do not vary greatly. b. When the economy is weak, rates of return across industry do not vary greatly. c. Rates of return across industry vary during a specific period of time. d. Rates of return across industry do not vary over time 7. c

3 8. When the Federal Reserve the discount rate, the money supply of the economy will increase. a. Raises b. Lowers c. does not change d. None of the above. 8. b 9. What is the first step of a proper top-down analysis of a company's prospects? a. The analysis of the global economy. b. The analysis of the domestic economy. c. The analysis of the industry the company is in. d. The analysis of the company's fundamentals. 9. a 10. Fiscal policy refers to the government's to stabilize the economy. a. influence of money supply and demand b. trading policy c. technology development d. spending and taxing 10. d 11. are indicators whose values reach troughs and peaks before the aggregate economy does. a. Front-running indicators b. Lagging indicators c. Leading indicators d. First indicators 11. c 12. Monetary policy refers to the government's to change investment and consumption demand. a. manipulation of money supply b. taxing policy c. exchange rate policy d. interstate business policy 12. a Use the following to answer questions 13-16: An industry analysis for manufacturers of a small personal care gadget observed the following characteristics: Industry sales have grown at 15-20% per year in recent years are expected to grow at 10-15% per year over the next three years. Some U.S. manufacturers are attempting to enter fast growing non-u.s. markets, which remain largely unexploited. Some manufacturers have created a new niche in the industry by selling directly to customers through mail order. Sales for this industry segment are growing at 40% per year. The current penetration rate in the U.S. is 60% of households and will be difficult to increase.

4 Manufacturers compete fiercely on the basis of price, and price wars within the industry are common. Some manufacturers are able to develop new, unexploited niche markets in the U.S. based on company reputation, quality, and service. Several manufacturers have recently merged, and it is expected that consolidation in the industry will increase. New manufacturers continue to enter the market.

5 13. Characteristics 4 and 5 would indicate that the industry is in the stage. A) Start-up B) Consolidation C) Maturity D) Relative decline 13. c 14. Characteristics would be typical of an industry that is in the start-up stage. A) 4 and 7 B) 1 and 4 C) 2 and 5 D) none of the above 14. d 15. Characteristics would be typical of an industry that is in the consolidation stage. A) 6 and 7 B) 1 and 4 C) 5 and 6 D) none of the above 15. a 16.Characteristics would be typical of an industry that is in the maturity stage. A) 1, 2 and 3 B) 4 and 5 C) 6, 7 and 8 D) none of the above 16.b 17. Consider two firms producing DVDs. One uses a highly automated robotic process, while the other use human workers on an assembly line and pays over time where there is heavy production demand. a. Which firm will have higher profits in a recession? In a boom? Explain briefly The robotics process entails higher fixed costs and lower variable (labor) costs. Therefore, this firm will perform better in a boom and worse in a recession. For example, costs will rise less rapidly than revenue when sales volume expands during a boom. b. Which firm s stock will have higher beta. Explain briefly Because its profits are more sensitive to the business cycle, the robotics firm will have the higher beta.

6 18. For each pair of firms, choose the one that you think would be more sensitive to the business cycle a. General Autos or General Pharmaceuticals. Explain briefly. General Autos. Pharmaceutical goods essential so they are not very affected by business cycles b. Friendly Airlines or Happy Cinemas. Explain briefly. Friendly Airlines. Travel expenditures are more sensitive to the business cycle than movie consumption.