Deck 6: Industry Analysis

Question 1

The more saturated an industry gets with competitors,the further along the life cycle it will probably be.

Answer 1

True

Question 2

The crossover point on the life cycle curve is the point where companies sell stock in an initial public offering (IPO).

Answer 2

False

Question 3

Due to intense needs for capital to fund growth,Stage I companies rarely pay cash dividends.

Answer 3

True

Question 4

The method that starts the stock valuation process with an economic analysis is called the "top-down" approach.

Question 5

Stock prices increase as companies reach the crossover point,since the company's earnings are now more predictable.

Question 6

The method of starting the stock valuation process with an analysis of the economy is referred to as the "bottom-up" approach.

Question 7

Investors who follow the bottom-up approach to stock valuation are referred to as "industry-analysts".

Question 8

The last step to the top-down approach is to analyze the overall health of the economy.

Question 9

Firms in the development stage finance their growth from internal cash flows.

Question 10

The life cycle curve in Chapter 6 is graphed so that the steeper the slope of the line the faster the growth rate of the industry.

Question 11

The first step in the top-down approach to stock valuation is analyzing the position of the industry in its life cycle.

Question 12

The presence of cash dividends increases the ability of some institutional investors to invest in companies.

Question 13

Stock dividends are used to signal to investors that a company is not making any profits to distribute.

Question 14

Industry life cycles predict an industry's sensitivity to the economy.

Question 15

Firms in the development stage are typically publicly owned.

Question 16

Stock prices plummet as industries move across the crossover point,because price-earnings ratios collapse as analysts lower growth expectations.

Question 17

A frequent source of capital for profitable Stage I companies is venture capitalists.

Question 18

The S&P 500 Index and Gross Domestic Product (GDP)seems to have similar long-term growth paths.

Question 19

Industry life cycles measure the growth path of an industry through five stages.

Question 20

An industry reaches the maturity stage when its sales growth matches the rate of growth of the economy.

Question 21

Companies that do not have a differentiated product and compete on price are probably in purely competitive industries.

Question 22

Ascertaining the competitive structure of an industry can help the analyst to determine the long-term profitability and outlook for that industry.

Question 23

If an industry is in the mature phase,this means that all companies in that industry will also be in the mature phase.

Question 24

When we regress grocery store sales against GDP data,we find a high correlation between the two and a cyclical trend-line of grocery sales around the least squares trendline.

Question 25

Comparing automobile sales to GDP shows that GDP seems to be more volatile than automobile sales.

Question 26

Industries in the decline stage suffer from shrinking sales because product innovation has not increased the product base over the years.

Question 27

It is always a safe bet to invest in companies in growing industries.

Question 28

Firms are most able to raise prices on products for which many substitute goods exist.

Question 29

When monopolies exist,they are almost always found in mature industries.

Question 30

Competition can be intense in oligopolies,due to price wars and international competition.

Question 31

Analyzing the structure of an industry can help an investor to determine the profitability of the companies in that industry.

Question 32

The lack of barriers to entry tends to help established firms by giving them power to increase prices and profits.

Question 33

Pure competition in manufacturing is common in the United States.

Question 34

Companies in mature industries still have a dramatic need for internal cash flows to finance future growth.

Question 35

One way of maintaining growth when domestic markets have become saturated is to expand into markets overseas.

Question 36

Dividend payout ratios in declining industries can often reach 100 percent of earnings.

Question 37

Oligopolistic industries are characterized by many competitors and few barriers to entry.

Question 38

The growth rate of the companies that make up the S&P 500 is an excellent proxy for the growth of mature companies.

Question 39

The structure of competition of an industry,and how freely companies can compete with each other,is irrelevant for the analysis of companies.

Question 40

Firms in industries with low barriers to entry are limited in their ability to raise prices.

Question 41

In the final stages of the business cycle,rotational investors will purchase basic materials and energy stocks.

Question 42

Porter's five competitive forces vary from industry to industry and directly affect the return on assets and return on equity.

Question 43

Different industries react similarly to changes in the business cycle.

Question 44

Companies that have a strong ability to control suppliers enjoy a competitive advantage.

Question 45

Intense rivalry between competitors has a different impact on the competitors than a new entrant in the market.

Question 46

Mature industries are not likely to be sensitive to short-term swings in the business cycle.

Question 47

Companies with consistently high returns on equity usually are highly leveraged to take advantage of the large profit margins.

Question 48

Rotational investing is defined as the process by which investors rotate out of losing stocks and into new stocks.

Question 49

The impact of intense rivalry within industries is similar to the threat of new entrants.

Question 50

Investors should buy consumer non-cyclical stocks in the early stages of recovery.

Question 51

When studying an industry,it is difficult to determine the best and worst performing companies in that industry.

Question 52

When analyzing an industry,individual companies seem to stand out for their superior performance.

Question 53

Most industries are similarly affected by the cyclical swings in the economy.

Question 54

Firms such as Walmart and McDonald's have a low level of bargaining power over their suppliers.

Question 55

Rotational investors study the business cycle and invest in companies that are likely to benefit from the predicted movements of the economy.

Question 56

Competitive strategies of individual firms do not have an impact on the outlook for the industry as a whole.

Question 57

Analysis of various industries gives the investor insights into the comparative performance of the entire economy.

Question 58

Investors usually anticipate movements in the economy before they actually happen.

Question 59

The relative importance of each of the five basic competitive forces is the same for almost every industry.

Question 60

Competitive strategies of individual firms have an immediate impact on the structure of the industry.

Question 61

Which of the following is the most significant detriment to the future profitability of the pharmaceutical industry?

A)Government regulation
B)Demographic trends
C)Generic drugs
D)Use of too much debt in their capital structure

Question 62

Which of the following four industry sectors would benefit the most from rising inflation?

A)Consumer cyclical
B)Basic materials
C)Household durable goods
D)Consumer non-cyclical

Question 63

Which of the following stages does not belong in the industry life cycle?

A)Growth
B)Stagnation
C)Decline
D)Maturity
E)Expansion

Question 64

A Stage II industry is one that is growing and thus provides opportunities without much risk.

Question 65

Which of the following is the proper order of the industry life cycle?

A)Development,growth,expansion,maturity,decline
B)Expansion,growth,development,maturity,decline
C)Development,expansion,growth,maturity,decline
D)Expansion,development,growth,maturity,decline
E)Growth,development,expansion,maturity,decline

Question 66

Growth firms generally pay higher cash dividends than mature firms.

Question 67

A technically innovative firm in a mature industry may provide better growth opportunities than a high-growth industry.

Question 68

Why would an investor want to use the rotational investing method?

A)It allows the investor to rotate out of losing stocks
B)The investor is attempting to profit from movements in the economic cycle
C)It is an easy method of employing dollar cost averaging
D)It assures the investor of owning the proper mix of stocks and bonds
E)It is easy to time the market for higher returns

Question 69

Which of the four following industries was not mentioned as an example of a consumer non-cyclical industry?

A)Utility companies
B)Food stocks
C)Pharmaceuticals
D)Tobacco stocks

Question 70

The pharmaceutical industry has to be concerned about the competition from generic versions of their drugs during their first 5 years after the release of a new drug.

Question 71

Which of the following economic structures of industries was not specifically mentioned in the chapter?

A)Monopoly
B)Pure competition
C)Semi-strong competition
D)Oligopolies

Question 72

When using the top-down approach to company valuation,which is the proper order for an analyst to use?

A)Macro-economic environment,company analysis,industry analysis
B)Company analysis,industry analysis,macro-economic environment
C)Macro-economic environment,industry analysis,company analysis
D)Industry analysis,company analysis,macro-economic environment
E)Company analysis,macro-economic environment,industry analysis

Question 73

The pharmaceutical industry has submitted almost 2000 drugs per year to the U.S.Food and Drug Administration between 1995 and 2005 and the approval rate is close to

A)3.3 percent
B)8.2 percent
C)10.0 percent
D)22.2 percent

Question 74

Which of the following industry sectors would an investor want to purchase at the trough of the business cycle?

A)Basic materials
B)Consumer non-cyclical
C)Consumer cyclical
D)Household durable goods

Question 75

Which of the following competitive forces is not one of the five mentioned in the chapter?

A)Threat of market entry by new competitors
B)Threat of substitute goods
C)Bargaining power of customers
D)Intensity of rivalry among competitors

Question 76

The pharmaceutical industry is dominated by international companies.

Question 77

A rotational investor will rotate through stocks that perform well in different stages of the economy in which order (from trough to peak)?

A)Basic materials; consumer cyclical; consumer noncyclical; household durable goods
B)Consumer cyclical; basic materials; consumer noncyclical; household durable goods
C)Basic materials; household durable goods; consumer cyclical; consumer non-cyclical
D)Household durable goods; consumer cyclical; consumer noncyclical; basic materials
E)Household durable goods; basic materials; consumer noncyclical; consumer cyclical

Question 78

Which one of the following combinations of ratios would indicate the lowest risk?

A)High long-term debt-to-equity and low return on equity
B)Low long-term debt-to-equity and high return on equity
C)Low long-term debt-to-equity and low return on equity
D)High long-term debt-to-equity and high return on equity

Question 79

It is almost always unwise to invest in an industry which is entering stage III of the industry life cycle.

Question 80

When analyzing the structure of an industry,which of the following factors is particular to the company only?

A)Government regulations
B)Barriers to entry
C)Product quality
D)All of the above affect industry structure