6.Which statement about industry risk is least accurate? A) Vertical integration may mitigate some risk of value chain competition. B) As the number of suppliers increases, the value of the producer decreases. C) Significant barriers to entry may increase the value of investment in an industry. D) Higher product standardization increases investment risk. The correct answer was B) As the number of suppliers increases, suppliers have less pricing power and thus less ability reduce return to the producer. The value of the producer increases, not decreases. Higher product standardization increases buyer power and thus investment risk. Significant barriers to entry allow higher returns to producers and increase the value of investment. Vertical integration along the value chain may mitigate competition for a firm. 7.Ginormous Technologies, Ltd. has an ROE of 14% and a required rate of return of 9%. Which statement is least likely to be characteristic of Ginormous and its industry? A) It has a positive franchise factor. B) The Herfindahl index is 0.02. C) The higher its earnings retention ratio, the higher its franchise P/E. D) It is a full flow-through firm. The correct answer was B) Ginormous is earning an excess return (its ROE is higher than its required rate of return), and thus it is unlikely to be in a highly competitive industry (a Herfindahl index of less than 0.1). A firm with ROE higher than the required rate of return has a positive franchise factor, thus the higher its earnings retention ratio, the higher its franchise P/E. The lower a firm’s inflation flow-through the lower the valuation, so full flow-through would likely be characteristic of a firm earning excess returns. 8.The Hartfactor Corporation is a producer of specialized medical devices, and has historically earned excess returns on a risk-adjusted basis. Which of the following is least likely to be characteristic of Hartfactor Corp. and its industry? A) A large number of suppliers. B) Vertical integration along the value chain. C) A Herfindahl index of 0.05. D) High cooperation. The correct answer was C) A Herfindahl index of 0.05 is considered a highly competitive industry, which is not likely to be characteristic of a company earning excess returns. A large number of suppliers means low supplier bargaining power, vertical integration reduces value chain competition, and high industry cooperation, all of which increase producer returns. 9.There are five firms in an industry. The market shares for firms one through five are 10%, 15%, 20%, 25%, and 30%, respectively. The Herfindahl index for the: A) two largest firms in the industry is 0.152. B) four largest firms in the industry is 0.125. C) industry is 0.225. D) industry is low, suggesting intense competition. The correct answer was C)
A Herfindahl index of more than 0.18 is an indication of low competition (concentrated industry players) in the industry. A Herfindahl index of less than 0.1 is an indication of intense competition in the industry. | 
发表于 2008-5-13 15:19
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