Equity Investments MCQ - Equity Investments Section 2

46 Which of the following is not one of Porter’s five forces?

This is not one of the five internal forces though it is part of external forces.

47 Industry competition is less intense and firm profitability is greater when there is:

Industry competition is less intense and firm profitability is greater when there is
(1) less rivalry among existing industry firms.
(2) less bargaining power of customers.
(3) less bargaining power of suppliers.

48 As an equity analyst, you are presented with the following statements about two industries:
i. Industry 1 has a few companies producing relatively homogenous products; high income elasticity of demand; high capital costs and investments in physical plants; rapid shifts in market shares of competing firms; and minimum regulatory influence.
ii. Industry 2 has a few companies with proprietary technologies, differentiated products with unique features, high switching costs, and minimum regulatory influence.
Based on the information provided in these two statements, it is most reasonable to conclude that compared to firms in Industry 1, those in Industry 2 would potentially have:

The economic profit (which is computed as the spread between return on capital and the cost of capital) tends to be larger in industries with differentiated products, greater pricing power, and high switching costs to consumers. Firms in Industry 2 have these features, whereas firms in Industry 1 have the exact opposite conditions.

49 Which of the following characteristics is most likely to be exhibited by the industry that is experiencing intense competitive rivalry among incumbent companies?

The factor that most influences customer purchase decisions is likely to also be the focus of competitive rivalry in the industry. In general, industries where price is a large factor in customer purchase decisions tend to be more competitive than industries in which customers value other attributes more highly.

50 Which of the following most accurately results in increased competition within
an industry?

	Barriers toEntry	Capacity	Concentration
A.	Low	Unused	Low
B.	High	Unused	Low
C.	High	Near full capacity	High

Low barriers to entry increase competition as they allow new entrants. Unused capacity results in intense price competition. Low concentration refers to a fragmented market which increases competition.