Question

A40. The intensity of industry rivalry will be low if the Growth Rate is high.

a)   True
b)   False

A41. Which of the following is a usual corporate goal?

a)   Sales maximization
b)   Market share maximization
c)   Earnings per share growth
d)   All of the above
e)   None of the above

A42. In finance, which of the following is a type of Arbitrage?

a)   Lending at a part-fixed and part-variable interest rate.
b)   Limited risk lending to low-income individuals
c)   Limited risk lending to high-income individuals,
d)   Borrowing and lending at two different interest rates.

A43. In Finance, Money has a time value, whereas, in Accounting, Money does not have a time value.

a)   True
b)   False

Answer 1

QUESTION 40 : True

Reason :

The intensity of rivalry among competitors in an industry refers to the extent to which firms within an industry put pressure on one another and limit each other’s profit potential. If rivalry is fierce, then competitors are trying to steal profit and market share from one another. As a result, this reduces profit potential for all firms within the industry. According to Porter’s 5 forces framework, the intensity of rivalry among firms is one of the main forces that shape the competitive structure of an industry.

Porter’s intensity of rivalry in an industry affects the competitive environment and influences the ability of existing firms to achieve profitability. For example, high intensity of rivalry means competitors are aggressively targeting each other’s markets and aggressively pricing products. This represents potential costs to all competitors within the industry.

High intensity of competitive rivalry can make an industry more competitive and thus decrease profit potential for the existing firms. In comparison, low intensity of competitive rivalry makes an industry less competitive. It also increases profit potential for the existing firms.

QUESTION 41 : All of the above

Reason :

Sales maximisation is a theoretical objective of a firm which involves selling as many units of a good or service as possible, without making a loss.

Share price maximization is a modern approach to financial management. Stock price maximization requires that managers take decisions that maximize stockholder wealth, that bondholders be fully protected from expropriation, that markets be efficient and that social costs be negligible.

The Growth in Earnings per share as a percentage change over the last trailing twelve month period. Earnings-per-share growth gives a good picture of the rate at which a company has grown its profitability.

QUESTION 42 : b)   Limited risk lending to low-income individuals

Reason :

Arbitrage is the purchase and sale of an asset in order to profit from a difference in the asset's price between markets. It is a trade that profits by exploiting the price differences of identical or similar financial instruments in different markets or in different forms. Arbitrage exists as a result of market inefficiencies and would therefore not exist if all markets were perfectly efficient.

QUESTION 43 : False

Reason :

The time value of money recognizes that receiving cash today is more valuable than receiving cash in the future. The reason is that the cash received today can be invested immediately and begin growing in value. For instance, if a company receives $1,000 today and is able to invest the amount immediately at a rate of 10% per year, the company will have $1,100 after 365 days.

If the time value of money is 10%, it also means that receiving $1,100 in one year is comparable to receiving $1,000 today. Accountants will state that the future value of $1,100 has a present value of $1,000. The difference of $100 will become interest income as over the 365 days that the company waits for the cash.

Importance of the Time Value of Money in Accounting

The time value of money is important in accounting because of the accountant's cost principle and revenue recognition principle. However, the concepts of materiality and cost/benefit allow the accountants to ignore the time value of money for the routine accounts receivable and accounts payable having credit terms of 30 or 60 days.