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Essentials Of Investments
Found in: Page 402
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

Janet Ludlow is preparing a report on U.S.-based manufacturers in the electric toothbrush industry and has gathered the information shown in Tables 12.8 and 12.9. Ludlow’s report concludes that the electric toothbrush industry is in the maturity (i.e., late) phase of its industry life cycle.

a. Select and justify three factors from Table 12.8 that support Ludlow’s conclusion.

b. Select and justify three factors from Table 12.9 that refute Ludlow’s conclusion.

Answer

a. Levelling of ROE, declining average P/E ratio, and increasing dividend payout

b. Growth forecasts of a mature industry, untapped market and new entry..

See the step by step solution

Step by Step Solution

Step by Step Solution Step 1: Justification of Ludlow’s conclusion ‘a’

From the table above

(i) The industry wide ROE is leveling off, implying that industry may be approaching a later stage of life cycle.

(ii) Declining average P/E ratios imply that investors are becoming less optimistic about growth.

(iii) Increasing dividend payout indicates firm’s not seeing reason to reinvest in it.

Step 2: Refusal of Ludlow’s conclusion ‘b’

From the table above:

(i) Industry forecasted growth rate at 10-15% implies a mature industry.

(ii) Untapped new US markets which are seeing entry by some firms.

(iii) Entry of new manufacturers in the market.

Most popular questions for Business-studies Textbooks

Use the following case in answering Problems 29 – 32:

Mary Smith, a Level II CFA candidate, was recently hired for an analyst position at the Bank of Ireland. Her first assignment is to examine the competitive strategies employed by various French wineries.

Smith’s report identifies four wineries that are the major players in the French wine industry. The key characteristics of each are cited in Table 12.6. In the body of Smith’s report, she includes a discussion of the competitive structure of the French wine industry. She notes that over the past five years, the French wine industry has not responded to changing consumer tastes. Profit margins have declined steadily, and the number of firms representing the industry has decreased from 10 to 4. It appears that participants in the French wine industry must consolidate in order to survive.

Smith’s report notes that French consumers have strong bargaining power over the industry.

She supports this conclusion with five key points, which she labels “Bargaining Power of Buyers”:

  • Many consumers are drinking more beer than wine with meals and on social occasions.
  • Increasing sales over the Internet have allowed consumers to better research the wines, read opinions from other customers, and identify which producers have the best prices.
  • The French wine industry is consolidating and consists of only 4 wineries today compared to 10 wineries five years ago.
  • More than 65% of the business for the French wine industry consists of purchases from restaurants. Restaurants typically make purchases in bulk, buying four to five cases of wine at a time.
  • Land, where the soil is fertile enough to grow grapes necessary for the wine production process, is scarce in France.

After completing the first draft of her report, Smith takes it to her boss, RonVanDriesen, to review. VanDriesen tells her that he is a wine connoisseur himself and often makes purchases from the South Winery. Smith tells VanDriesen, “In my report, I have classified the South Winery as a stuck-in-the-middle firm. It tries to be a cost leader by selling its wine at a price that is slightly below the other firms, but it also tries to differentiate itself from its competitors by producing wine in bottles with curved necks, which increases its cost structure. The end result is that the South Winery’s profit margin gets squeezed from both sides.” VanDriesen replies, “I have met members of the management team from the South Winery at a couple of the wine conventions I have attended. I believe that the South Winery could succeed at following

both cost leadership and a differentiation strategy if its operations were separated into distinct operating units, with each unit pursuing a different competitive strategy.” Smith makes a note to do more research on generic competitive strategies to verify VanDriesen’s assertions before publishing the final draft of her report.

Smith notes in her report that the West Winery might differentiate its wine product on attributes that buyers perceive to be important. Which of the following attributes would be the most likely area of focus for the West Winery to create a differentiated product?

a. The method of delivery for the product

b. The price of the product

c. A focus on customers aged 30 to 45

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