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Q.19I

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Essentials Of Investments
Found in: Page 397
Essentials Of Investments

Essentials Of Investments

Book edition 9th
Author(s) Zvi Bodie, Alex Kane, Alan Marcus, Alan J. Marcus
Pages 748 pages
ISBN 9780078034695

Short Answer

Here are four industries and four forecasts for the macro-economy. Choose the industry that you would expect to perform best in each scenario.

Industries: housing construction, health care, gold mining, steel production.

Economic Forecasts:

Deep recession: falling inflation, falling interest rates, falling GDP.

Superheated economy: rapidly rising GDP, increasing inflation and interest rates.

Healthy expansion: rising GDP, mild inflation, low unemployment.

Stagflation: falling GDP, high inflation.

Answer

Health care (non-cyclical) : Deep recession

Steel production (Cyclical): Superheated economy

Housing construction (Cyclical but sensitive to interest rate reduction): Healthy expansion

Gold mining (countercyclical) Stagflation

See the step by step solution

Step by Step Solution

Step by Step Solution Step 1: Definition of economic recession

A period of temporary economic decline in trading and industrial activity is known as an economical recession.

Step 2: Categorization of industries

Health care (non-cyclical) : Deep recession

Steel production (Cyclical): Superheated economy

Housing construction (Cyclical but sensitive to interest rate reduction): Healthy expansion

Gold mining (countercyclical Stagflation

Most popular questions for Business-studies Textbooks

Universal Auto is a large multinational corporation headquartered in the United States.

For segment reporting purposes, the company is engaged in two businesses: production of motor vehicles and information processing services.

The motor vehicle business is by far the larger of Universal’s two segments. It consists mainly of domestic United States passenger car production, but it also includes small truck manufacturing operations in the United States and passenger car production in other countries. This segment of Universal has had weak operating results for the past several years, including a large loss in 2012. Although the company does not reveal the operating results of its domestic passenger car segments, that part of Universal’s business is generally believed to be primarily responsible for the weak performance of its motor vehicle segment.

Idata, the information processing services segment of Universal, was started by Universal about 15 years ago. This business has shown strong, steady growth that has been entirely internal: No acquisitions have been made.

An excerpt from a research report on Universal prepared by Paul Adams, a CFA candidate, states: “Based on our assumption that Universal will be able to increase prices significantly on U.S. passenger cars in 2013, we project a multibillion-dollar profit improvement . . .”

a. Discuss the concept of an industrial life cycle by describing each of its four phases.

b. Identify where each of Universal’s two primary businesses—passenger cars and information processing—is in such a cycle.

c. Discuss how product pricing should differ between Universal’s two businesses, based on the location of each in the industrial life cycle.

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