Chapter 17 – Macroeconomic and Industry Analysis
17–21
54. The life cycle stage in which industry leaders are likely to emerge is the
A. start-up stage.
B. maturity stage.
Difficulty: Easy
55. Investment manager Peter Lynch refers to firms that are in bankruptcy or soon might be
as
A. slow growers.
B. stalwarts.
Difficulty: Easy
56. A top-down analysis of a firm’s prospects starts with
A. an examination of the firm’s industry.
B. an evaluation of the firm’s position within its industry.
Difficulty: Easy
Chapter 17 – Macroeconomic and Industry Analysis
17–22
57. Over the period 1999-2006, which of the following countries had a change in its real
exchange rate that was favorable for U.S. consumers who want to buy its goods?
A. Canada
B. Italy
Difficulty: Easy
58. Over the period 1999-2006, which of the following countries had a change in its real
exchange rate that was most unfavorable for U.S. consumers who want to buy its goods?
D. France
E. Japan
Difficulty: Easy
59. In recent years, P/E multiples have
A. fallen dramatically.
Difficulty: Easy
Chapter 17 – Macroeconomic and Industry Analysis
17–23
60. In recent years, P/E multiples for S&P 500 companies have
A. ranged from -1 to -10.
B. ranged from 1 to 8.
Difficulty: Easy
61. The industry with the highest ROE in 2007 was
A. food.
B. data storage.
Difficulty: Easy
62. The industry with the lowest ROE in 2007 was
A. food.
B. data storage.
Difficulty: Easy
Chapter 17 – Macroeconomic and Industry Analysis
17–24
63. The industry with the lowest return in 2007 was
D. brokerage.
E. banking.
Difficulty: Easy
64. The industry with the highest return in 2007 was
D. brokerage.
E. banking.
Difficulty: Easy
65. Investors can ______ invest in an industry with the highest expected return by purchasing
______.
A. most easily; industry-specific iShares
Difficulty: Easy
Chapter 17 – Macroeconomic and Industry Analysis
17–25
66. Which of the following are key economic statistics that are used to describe the state of
the macroeconomy?
I) gross domestic product
II) the unemployment rate
III) inflation
IV) consumer sentiment
V) the budget deficit
A. I, II, and V
B. I, III, and V
Difficulty: Easy
67. An example of a positive demand shock is
A. a decrease in the money supply.
B. a decrease in government spending.
Difficulty: Easy
Chapter 17 – Macroeconomic and Industry Analysis
17–26
68. An example of a negative demand shock is
A. a decrease in the money supply.
B. a decrease in government spending.
Difficulty: Easy
69. During which stage of the industry life cycle would a firm experience stable growth in
sales?
D. Start-up
E. Stabilization
Difficulty: Easy
70. The emerging stock market exhibiting the highest local currency return in 2007 was
A. Russia
Difficulty: Moderate
Chapter 17 – Macroeconomic and Industry Analysis
17–27
71. Sector rotation
A. should always be carried out.
B. is never worthwhile.
Difficulty: Easy
72. According to Michael Porter, there are five determinants of competition. An example of
_____ is when new entrants to an industry our pressure on prices and profits.
D. Bargaining power of Buyers
E. Bargaining power of Suppliers
Difficulty: Easy
Chapter 17 – Macroeconomic and Industry Analysis
17–28
73. According to Michael Porter, there are five determinants of competition. An example of
_____ is when competitors seek to expand their share of the market.
A. Threat of Entry
Difficulty: Easy
74. According to Michael Porter, there are five determinants of competition. An example of
_____ is when the availability limits the prices that can be charged to customers.
A. Threat of Entry
B. Rivalry between Existing Competitors
Difficulty: Easy
Chapter 17 – Macroeconomic and Industry Analysis
17–29
75. According to Michael Porter, there are five determinants of competition. An example of
_____ is when a buyer purchases a large fraction of an industry’s output and can demand price
concessions.
A. Threat of Entry
B. Rivalry between Existing Competitors
C. Pressure from Substitute Products
Difficulty: Easy
76. Assume the U.S. government was to decide to increase the budget deficit. This action will
most likely cause __________ to increase
A. interest rates
B. government borrowing
Difficulty: Easy
Chapter 17 – Macroeconomic and Industry Analysis
17–30
77. If interest rates decrease, business investment expenditures are likely to ______ and
consumer durable expenditures are likely to _________.
D. decrease, decrease
E. be unaffected, be unaffected.
Difficulty: Moderate
78. An example of a defensive industry is ________.
A. the automobile industry
B. the tobacco industry
Difficulty: Easy
Two firms, C and D, both produce coat hangers. The price of coat hangers is $1.20 each.
Firm C has total fixed costs of $750,000 and variable costs of 30 cents per widget. Firm D has
total fixed costs of $400,000 and variable costs of 50 cents per widget. The corporate tax rate
is 40%. If the economy is strong, each firm will sell 2,000,000 widgets. If the economy enters
a recession, each firm will sell 1,400,000 widgets.
Chapter 17 – Macroeconomic and Industry Analysis
17–31
79. If the economy enters a recession, the total revenue of Firm C will be ________.
D. $0
E. none of the above
Difficulty: Moderate
80. If the economy enters a recession, the total cost of Firm C will be ________.
A. $1,680,000
Difficulty: Moderate
81. If the economy enters a recession, the before tax profit of Firm C will be ________.
A. $1,680,000
B. $1,170,000
Difficulty: Moderate
Chapter 17 – Macroeconomic and Industry Analysis
17–32
82. If the economy enters a recession, the tax of Firm C will be ________.
A. $1,680,000
B. $750,000
Difficulty: Moderate
83. If the economy enters a recession, the after tax profit of Firm C will be ________.
A. $1,680,000
B. $750,000
Difficulty: Moderate
84. If the economy is strong, the total revenue of Firm C will be ________.
A. $1,680,000
B. $1,400,000
Difficulty: Moderate
Chapter 17 – Macroeconomic and Industry Analysis
17–33
85. If the economy is strong, the total cost of Firm C will be ________.
A. $1,680,000
Difficulty: Moderate
86. If the economy is strong, the before tax profit of Firm C will be ________.
A. $1,680,000
Difficulty: Moderate
87. If the economy is strong, the tax of Firm C will be ________.
D. $204,000
E. none of the above
Difficulty: Moderate
Chapter 17 – Macroeconomic and Industry Analysis
17–34
88. If the economy is strong, the after-tax profit of Firm C will be _______.
A. $0
B. $6,000
Difficulty: Moderate
89. If a firm’s sales decrease by 15% and profits decrease by 20% during a recession, the
firms operating leverage is ____________?
D. -5
E. none of the above
Difficulty: Moderate
Chapter 17 – Macroeconomic and Industry Analysis
17–35
Short Answer Questions
90. Discuss the tools of the U.S. government’s “demand-side” policy. Include in your
discussion of these tools the relative advantages and disadvantages of each in terms of the
effect of the use of these tools on the economy.
The two tools of the government’s “demand-side” policy are fiscal and monetary policy.
Fiscal policy is the use of government spending and taxing for the specific purpose of
stabilizing the economy. Fiscal policy, once enacted, has the most direct and immediate effect
on the economy. However, the formulation and implementation of fiscal policy is extremely
Difficulty: Moderate
Chapter 17 – Macroeconomic and Industry Analysis
17–36
91. Discuss the National Bureau of Economic Research (NBER)’s indexes of economic
indicators, and how each of the categories of these indicators might be used by the securities’
analyst.
The NBER has developed a set of cyclical indicators to help forecast, measure, and interpret
short-term fluctuations in economic activity. The leading economic indicators are those that
tend to increase or decrease in advance of the rest of the economy. These indicators are used
Difficulty: Moderate
Chapter 17 – Macroeconomic and Industry Analysis
17–37
92. Discuss the industry life cycle, how this concept can be used by security analysts, and the
limitations of this concept for security analysis.
The industry life cycle may be defined by the following stages: start up (rapid and increasing
growth), consolidation (sable growth), maturity (slowing growth), and relative decline
(minimal or negative growth). Investors interested in identifying new, and presumably
ultimately successful, industries will use this technique, trying to get in on the “ground floor”.
In the start up stage, no historical data is present; thus, one cannot identify potentially
Difficulty: Moderate
Chapter 17 – Macroeconomic and Industry Analysis
17–38
93. Discuss the ways in which the global economy might have an effect on a firm whose
headquarters are in Montana. Be specific – cite some of the relevant factors that should be
considered.
A firm that operates from Montana cannot ignore the global economy. The firm may make
sales to other countries, employ people from other countries, and invest in other countries. It
may face price competition from similar firms abroad, be subject to wages that are different
Difficulty: Easy
Chapter 17 – Macroeconomic and Industry Analysis
17–39
94. List and discuss three of the five determinants of competition suggested in Porter’s 1985
study.
The determinants are: the threat of entry from new competitors, rivalry between existing
competitors, price pressure from substitute products, the bargaining power of buyers, and the
bargaining power of suppliers. Each of these is discussed below.
Threat of entry from new competitors – If there are high profit margins in the industry, new
competitors will be likely to enter. There may be some barriers to entry that existing firms can
Difficulty: Moderate