1 . The differencebetween a firm’s balance sheet assets and liabilities is equal to the firm’s:
A)market value ofequity.
B)intrinsic value of equity.
C)book value ofequity.
The correct answer wasC
Book value of equityis equal to balance sheet assets minus liabilities.
2 . Industry analysisis most likely to provide an analyst with insight about a company’s:
A)competitivestrategy.
B)financialperformance.
C)pricing power.
The correct answer wasC
Industry analysisprovides a framework for an analyst to understand a firm in relation to itscompetitive environment, which determines how much pricing power a firm has.Competitive strategy and financial performance are aspects of company analysis.
3 . Use the followinginformation and the dividend discount model to find the value of GoFlower,Inc.’s, common stock.
§ Last year’s dividend was $3.10 per share.
§ The growth rate in dividends is estimated tobe 10% forever.
§ The return on the market is expected to be12%.
§ The risk-free rate is 4%.
§ GoFlower’s beta is 1.1.
A)$121.79.
B)$34.95.
C)$26.64.
The correct answer was A
The required returnfor GoFlower is 0.04 + 1.1(0.12 – 0.04) = 0.128 or 12.8%. The expect dividendis ($3.10)(1.10) = $3.41. GoFlower’s common stock is then valued using theinfinite period dividend discount model (DDM) as ($3.41) / (0.128 – 0.10) =$121.79.
4 . Which of thefollowing statements about the industry life cycle is most accurate?
A)The mature stage isfollowed by a shakeout stage and a decline stage.
B)Industry growthrates are highest in the embryonic stage.
C)The growth stage istypically characterized by decreasing prices.
The correct answer wasC
Prices tend todecrease in the growth stage as firms begin to realize economies of scale inproduction. The stages of the industry life cycle, in order, are embryonic,growth, shakeout, mature, and decline. Industry growth is slow during theembryonic stage as firms develop products and attempt to gain customeracceptance.
5 . Market sharestability within an industry is least likely to result from a high level of:
A)product innovation.
B)barriers to entry.
C)switching costs.
The correct answerwas: A
Frequent introductionsof new products and innovations tend to make firms’ market shares within anindustry less stable. High barriers to entry into the industry and highswitching costs for customers to change to a competing product both contributeto market share stability.
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