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Mary Moore is preparing a report on the commercial banking industry. As she gleaned information from the competitors annual reports she encountered the following statements in the CEO’s letters to their shareholders and the Management Discussion and Analysis (MD&A) section:
William Spencer, CEO of Western Banks, stated in the MD&A: “Consolidation within the industry will continue at its current pace, or perhaps accelerate, as banking concerns seek to increase their presence and market share.”
Margaret Acosta, CEO of Southwest Banking, stated in her letter to the shareholders: “Competition is becoming increasingly diverse as banks continue to increase in size and offer products ranging from insurance and mutual funds to high tech interaction with customers.”
Maria Bellini, CEO of Atlantic Mercantile Banks, noted in the MD&A that: “Cost advantages in most traditional banking activities seem to be mostly gone now, which will impact the industry future profitability.”
Moore is most likely to report that the commercial banking industry has high rivalry among competitors based on:
A)
Margaret and Maria's statements only.
B)
William and Margaret's statements only.
C)
William and Maria's statements only.



William and Maria's statements support arguments for rivalry among commercial banks in that they indicate that banks must increase market share through mergers and acquisitions and that traditional banking activities are now commodities. Margaret's statement suggests that banks are offering increasingly diverse products in an attempt to differentiate – the opposite of a commodity-type business.

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While Joseph Donovan, CFA, was interviewing Gene Hickman, the CEO of Hickman Supply, Hickman made the following comments on the auto supply industry:
  • Auto manufacturers are relying on Tier 1 suppliers for more and more sub-assembly work and quality control and testing.
  • The additional subassembly work facilitates specialization among suppliers and allows them to resell their expertise to other auto manufacturers.
  • The additional subassembly work requires additional capital investment and risk taking by the suppliers.

Given these statements, Donovan is most likely to conclude that barriers to entry to the auto supply industry have increased due to:
A)
Statements 2 and 3 only.
B)
Statements 1 and 2 only.
C)
Statements 1 and 3 only.



Based on the Porter model, increased specialization and an increase in capital investment may each act to increase barriers to entry. The fact that auto manufacturers are relying more and more on their suppliers may be interpreted as an industry dynamic that would attract more competition. Finally, the negotiation for lower prices by auto manufacturers suggests that suppliers are losing some bargaining power.

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an analyst was assessing a pharmaceutical company’s competitive strategy, the length of the drug patent would be related to which of Porter's Five Forces?
A)
Bargaining power of buyers.
B)
Threat of new entrants (Entry barriers).
C)
Rivalry among existing competitors.



Long drug patents make entry into the industry difficult; therefore this relates to barriers to entry

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An industry that manufactures and sells a commodity-like product will face increased competition primarily because of greater:
A)
bargaining power of buyers.
B)
threat of substitute products.
C)
threat of new entrants.



Substitute products limit the profit potential of an industry.  Why?  They limit the prices firms can charge.  There will be higher levels of competition and lower profit margins for more commodity-like products.

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Which of the following is NOT one of Porter’s five factors determining the intensity of competition within an industry?
A)
Threat of substitute products.
B)
Bargaining power of the firm's creditors.
C)
Rivalry among existing competitors.



The bargaining power of the firm’s customers and suppliers along with the threat of substitute products, the threat of new entrants, and the rivalry among existing competitors comprise Porter’s five factors. The bargaining power of the firm’s creditors is not one of Porter’s five factors.

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With respect to industry attractiveness, the key concern is whether the:
A)
industry is currently profitable.
B)
industry is attractive in terms of long-term profit potential.
C)
industry is currently experiencing significant sales growth.



The key concern of industry attractiveness is whether the industry is attractive in terms of long-term profit potential.

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Which of the following are likely to result in higher profitability for a firm in a competitive industry?
A)
Low supplier concentration, low buyer concentration, and commoditization of the industry’s products.
B)
High barriers to entry, low barriers to exit, and high switching costs.
C)
Product differentiation, low switching costs, and high barriers to exit.



All else equal, high barriers to entry, low barriers to exit, and high switching costs will tend to result in higher profitability for a firm in a competitive industry.

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Joel Mason, owner of a ball-bearing factory in Cleveland, finds two interesting stories while reading The Wall Street Journal at breakfast. He reads that the government instituted a tariff on imported bearings, and that overall sales of ball bearings in the region rose 18% over the last year. Of the two changes mentioned above, which are likely to have a positive effect on Mason’s company over the long run?

A) Neither of them.

B) The newly passed tariff.

C) The higher industry growth rate.





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Neither of the issues presented are likely to have any long-term effect on the company, as the market generally responds to such changes and finds a new equilibrium. High growth rates tend to attract more competitors, and the effectiveness of tariffs is questionable even in the short term.

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Grant’s Candies, a retail store in downtown Grempton, has seen a sharp increase in demand for candy over the last several months. The construction of a new school and a factory that employs 1,500 people has drawn many new families to Grempton. Willie Grant, owner of Grant’s Candies, is ecstatic about the new business and puts in a bid for a vacation home based on his higher expected profits. Accountant Callie Trakh, CFA, warns against getting too excited. Her chief concern is most likely fears of:
A)
an influx of new competitors.
B)
new and innovative products entering the market.
C)
a population exodus should the economic climate change and the factory shut down.



While all of the concerns listed are legitimate worries for any business, we have no information that particularly bears on new products or economic issues. However, a larger market and higher growth is likely to attract competitors to the market.

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Strawline, Inc. manufactures straws using a new technology which allows straws to be made with an 11% reduction in costs. According to Porter’s model, which of the following is most likely?
A)
Strawline’s increased profit margins will allow it to increase financial leverage.
B)
Any initial advantage will eventually be eliminated as competitors adopt the same technology.
C)
Strawline’s increased profit margins will allow it to decrease financial leverage.



New technology does not offer a lasting advantage since the technology is available to all of Strawline’s current and potential competitors.

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上一主题: Equity Valuation【 Reading 37】Sample
下一主题: Equity Valuation【 Reading 35】Sample