6 Net income of an industry can be expected to be LOWER if the following are tru

Question

6 Net income of an industry can be expected to be LOWER if the following are true (circle all that apply) (A) (B) (C) (D) The power of suppliers is low The power of customers is high There are low barriers to entry Substitutes are not a threat 7 A reason why a firm should take on debt is to (circle all that apply) (A) Borrowing money always makes sense (B) The interest rate on debt is lower than the expected return on projects you are financing (C) t is always good to finance by a mixture of debt and equity (D) None of the above 8 What exists between industries in a value chain (circle all that apply)? (A) (B) (C) (D) Bond markets Markets for initial public offerings Equity markets Markets setting the price of a product supplied to the next Industry in the chain

Explanation / Answer

6. The right answer is option B. The power of customers is high. and option C. There are low barriers to entry.

Explanation: All the options are elements of Porter's five forces model. The profitability of an industry diminishes when:

1) The bargaining of the customer or supplier is high

2) There is intense rivalry in the industry

3) There are low entry barriers

4) There is a high threat of substitutes.

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