FINANCIAL ANALYSIS IS VALUABLE OUTSIDE TO THE EQUITY CAPITAL MARKET...

5. Financial analysis is valuable outside to the equity capital markets.

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Question Prepare an analysis of the automobile manufacturing industry using Porter’s five forces framework. For each component force provide

support for your conclusion. In addition, at the completion of your analysis provide a conclusion, along with support, of whether you expect the

automobile industry to report high or low profitability in the near future.

Answer Buyer Power--HIGH--It appears that consumers are sensitive to price as many manufacturers have similar offerings in each auto product

class. In addition, cars are a large part of most consumers budget. Working against high buyer power is brand loyalty and control of the

distribution channel.

Supplier Power--LOW--Given auto makers size it is likely that these companies exert significant influence over suppliers, leading to low

supplier power.

Rivalry among existing firms--HIGH--There is intense rivalry among auto firms, which is evidenced by heavy advertising. In addition, the

market is mature so additional market share must come from other competitors leading to intense competition.

Threat of new entrants--MEDIUM--While entirely new auto companies are rare, non-U.S. companies entering the U.S. market is more

common. Kia and Hyundai are companies that have recently started competing in the U.S. market.

Threat of substitutes--MEDIUM/LOW--It is doubtful that many U.S. consumers are going to switch to mass transit or bicycles due to the

logistics of the U.S., however one threat to auto manufacturers is used cars. As cars become more reliable and longer lasting many

consumers may switch from purchasing new cars to used.

Question Prepare an analysis of the grocery industry using Porter’s Five Forces framework. For each component force provide support for your

conclusion. In addition, at the completion of your analysis provide a conclusion, along with support, of whether you expect the grocery industry to

report high or low profitability in the near future.

Answer Suggested solution:

You may want to have students think about grocery chains different strategies. For example, Wal-Mart and Kroger’s seem to be attempting

to be the low cost providers (fewer brand choices, less service, less attractive stores), while Whole Foods and Harris Teeter are attempting

to be full service providers (many brands, nicer looking stores, more services).

Here is a suggested solution for the Wal-mart/Kroger grocery segment:

Buyer Power--HIGH--It appears that consumers are sensitive to price as many grocery chains have similar offerings in each grocery chain.

There is a high level of discounting so consumers do not appear to be brand loyal. However, many grocery chains offer additional discounts

to frequent buyers or members which increase brand loyalty.

Supplier Power--MEDIUM to LOW--Given that there are fewer grocery chains, due to consolidation and bankruptcies it is likely that these

companies exert more and more influence over suppliers, leading to low supplier power.

Rivalry among existing firms--HIGH--There is intense rivalry among grocery chains, which is evidenced by heavy advertising and

discounting/coupons. In addition, the market is mature so additional market share must come from other competitors leading to intense

competition.

Threat of new entrants--MEDIUM--There have been very few new U.S. grocery chains started, however there does appear to be more

non-U.S. companies entering the U.S. market. Ahold, Tesco and Aldi are foreign companies that have recently started competing in the

U.S. market.

Threat of substitutes--MEDIUM/LOW--With the rise of the Whole Foods segment many consumers are going upscale to obtain better

services in exchange for higher prices. The general state of the economy plays an important role in how substitutes are viewed when

examining the Wal-Mart/ Kroger segment of the grocery industry.

Question Tremble Company manufactures outdoors wear for women. During 2009, the company reported the following items that affected cash.

Required:

Indicate whether each of these items is a cash flow from operating activities (O), investing activities (I), or financing activities (F).

_____A. Paid cash for supplies

_____B. Purchased equipment by paying cash

_____C. Collected cash on account from customers

_____D. Paid dividends to stockholders

_____E. Paid suppliers for fabric

_____F. Borrowed money from a bank on a long-term note

_____G. Paid interest to bank on the note

_____H. Paid wages to employees

_____I. Sold shares of common stock to new stockholders

Answer A. O

B. I

C. O

D. F

E. O

F. F

G. O

H. O

I. F

Question During 2011, Waggoner Company performed services for which customers paid or promised to pay $587,000. Of this amount, $552,000

had been collected by year end. Waggoner paid $340,000 in cash for employee wages and owed the employees $15,000 at the end of the year for

work that had been done but had not paid for. Waggoner paid interest expense of $3,000 and $195,000 for other service expenses. The income tax

rate was 35%, and income taxes had not yet been paid at the end of the year. Waggoner declared and paid dividends of $20,000. There were no

other events that affected cash.