Question 1

Economies of scale are present where the cost of producing each unit declines as the quantity of product produced increases.In this environment, large-scale firms have a cost advantage.Thus, economies of scale serve to ____the cost of entry into an industry.

A)increase
B)decrease

increase

Accepted Answer

Economies of scale increase the cost of entry into an industry because new entrants must invest heavily to achieve a competitive unit cost.

Question 2

For the following problem requires the data shown below for a large firm (Pfizer) and a smaller firm (Immunogen) in the Chemicals & Allied Products industry:

Calculate each firm's 2000 ROE.

D

Accepted Answer

D

Question 3

The ____hypothesis posits that a firm may choose high leverage as a competitive strategy to either win market share from rivals or to deter entry into the industry.&#10;A)long-purse&#10;B)strategic capital structure&#10;C)competitive leverage&#10;D)leverage aggressiveness

Accepted Answer

leverage aggressiveness

Question 4

For the following problem requires the data shown below for a large firm (Pfizer) and a smaller firm (Immunogen) in the Chemicals & Allied Products industry:
$\begin{array}{lrrrrrrrrr}&\text {No. }&&&&&&&\text { Values}&\text {(\$mn.) }\\&\text { Bus.}&\text { ..Values}&\text { (s mn.) }&\text {at } \mathrm{Y-E}-&\text { 1999.. }&\text { 1999 Values}&(\$ \text { mn.)}&\text { at Year-End }& 2000\\\text { Company }&\text {Seg.}&\text { PP\&E }&\text {TA}&\text { Debt}&\text { BEQ}&\text { Sales}&\text { Net.Inc. }&\text {BEQ}&\text { MEQ }\\\hline \text { PFIZER } & 3 & 5,343 & 20,574 & 5,526 & 8,887 & 29,574 & 3,718 & 16,076 & 290,216 \\\text { IMMUNOGEN } & 1 & 158 & 7,17 & 0.07 & 5.3 & 11.18 & -0.24 & 154 & 822.3\end{array}$

-Conduct a DuPont ROE breakdown analysis for each firm.Which breakdown ratio is most important in explaining ROE differential between the two firms?

A)profit margin
B)total asset turnover
C)leverage

Accepted Answer

The answer of For the following problem requires the data...

Question 5

Capacity surpluses result in (i) product prices and (ii) profit margins. (i) (ii)&#10;A)lower higher&#10;B)higher lower&#10;C)lower lower&#10;D)higher higher

Accepted Answer

Capacity surpluses typically lead to lower product prices due to increased competition and excess supply. This, in turn, often results in lower profit margins as companies reduce prices to stimulate demand and compete for market share.

Question 6

In a theoretical paper, Williams (1995) develops a model of industry equilibrium that incorporates agency costs due to both creditor-shareholder and management-shareholder conflicts.His model has implications for the distribution of firms within an industry in equilibrium.Which of the following statements correctly describes Williams' depiction of industry equilibrium?

A)Each industry has a core of large, profitable, secure, capital-intensive firms, each with at least some external debt, and a competitive fringe of small, marginally profitable or unprofitable, risky, labor-intensive firms.
B)All firms in an industry will ultimately be large, labor-intensive firms with large proportions of debt in their capital structures.
C)All firms in an industry will ultimately be small, capital-intensive firms with no debt.
D)All firms in an industry will ultimately be large, capital-intensive firms with large proportions of debt in their capital structures.

Accepted Answer

Williams' model suggests an industry equilibrium where there is a core of large, capital-intensive firms with some external debt, surrounded by a competitive fringe of smaller, riskier, labor-intensive firms. This reflects the impact of agency costs on firm structure and industry distribution.

Question 7

The following problem requires the data shown below for a large firm (Pfizer) and a smaller firm (Immunogen) in the Chemicals & Allied Products industry:
$\begin{array}{lrrrrrrrrr}&\text {No. }&&&&&&&\text { Values}&\text {(\$mn.) }\\&\text { Bus.}&\text { ..Values}&\text { (s mn.) }&\text {at } \mathrm{Y-E}-&\text { 1999.. }&\text { 1999 Values}&(\$ \text { mn.)}&\text { at Year-End }& 2000\\\text { Company }&\text {Seg.}&\text { PP\&E }&\text {TA}&\text { Debt}&\text { BEQ}&\text { Sales}&\text { Net.Inc. }&\text {BEQ}&\text { MEQ }\\\hline \text { PFIZER } & 3 & 5,343 & 20,574 & 5,526 & 8,887 & 29,574 & 3,718 & 16,076 & 290,216 \\\text { IMMUNOGEN } & 1 & 158 & 7,17 & 0.07 & 5.3 & 11.18 & -0.24 & 154 & 822.3\end{array}$

-Which of the following factors most likely explains the difference in the profitabilities of these two firms?

A)differential ability to secure debt financing
B)differential economies of scale
C)the difference in the number of business segments

Accepted Answer

The significant difference in sales and net income between Pfizer and Immunogen suggests that Pfizer benefits from economies of scale, which allows it to be more profitable. Pfizer's larger size and broader business segments enable it to spread its costs over a larger revenue base.

Question 8

The ____hypothesis posits that a firm may choose low leverage as a competitive strategy to squeeze other, more highly levered, firms out of its industry.&#10;A)having a long-purse&#10;B)strategic capital structure&#10;C)competitive leverage&#10;D)leverage aggressiveness

Accepted Answer

The "having a long-purse" hypothesis suggests that a firm may maintain low leverage to outlast competitors with higher leverage, using its financial flexibility as a competitive advantage.

Deck 7: Industry Analysis and Financial Policies and Strategies