B the passenger car business in the united states has

Info iconThis preview shows pages 3–5. Sign up to view the full content.

View Full Document Right Arrow Icon
b. The passenger car business in the United States has probably entered the final stage in the industrial life cycle because normalized growth is quite low. The information processing business, on the other hand, is undoubtedly earlier in the cycle. Depending on whether or not growth is still accelerating, it is either in the second or third stage. 17-3
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
c. Cars: in the final stages of the life cycle, demand tends to be price sensitive. Thus, Universal can not raise prices without losing volume. Moreover, given the industry’s maturity, cost structures are likely to be similar across all competitors, and any price cuts can be matched immediately. Thus, Universal’s car business is boxed in: Product pricing is determined by the market, and the company is a “price-taker.” Idata: Idata should have much more pricing flexibility given its earlier stage in the industrial life cycle. Demand is growing faster than supply, and, depending on the presence and/or actions of an industry leader, Idata may set prices high to maximize current profits and generate cash for product development, or set prices low in an effort to gain market share. 15. a. A basic premise of the business cycle approach to investment timing is that stock prices anticipate fluctuations in the business cycle. For example, there is evidence that stock prices tend to move about six months ahead of the economy. In fact, stock prices are a leading indicator for the economy. Over the course of a business cycle, this approach to investing would work roughly as follows. As the investor perceives that the top of a business cycle is approaching, stocks purchased should not be vulnerable to a recession. When the investor perceives that a downturn is at hand, stock holdings should be lightened with proceeds invested in fixed-income securities. Once the recession has matured to some extent, and interest rates fall, bond prices will rise. As the investor perceives that the recession is about to end, profits should be taken in the bonds and reinvested in stocks, particularly those in cyclical industries with a high beta. Abnormal returns generally will only be earned if these asset allocation switches are timed better than those of other investors. Switches made after the turning points may not lead to excess returns. b. Based on the business cycle approach to investment timing, the ideal time to invest in a cyclical stock such as a passenger car company would be just before the end of a recession. If the recovery is already underway, Adam’s recommendation would be too late. The equities market generally anticipates the changes in the economic cycle. Therefore, since the “recovery is underway,” the price of Universal Auto should already reflect the anticipated improvements in the economy. 16.
Background image of page 4
Image of page 5
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

Page3 / 7

b The passenger car business in the United States has...

This preview shows document pages 3 - 5. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online