IIA Certified Internal IIA-CIA-PART4 Questions & Answers

• Question 1:

  Entry into a new business may be made by acquisition. The analysis differs from that for entry by internal development. A key point is that prices are set in the market for acquisitions. Accordingly, a buyer should most likely expect to make above- average profits when the

  A. Market is active and well organized.

  B. Seller can choose to continue operating the business.

  C. Market for acquisitions is imperfect.

  D. Buyer adopts a sequential entry strategy.

  Correct Answer: C

  Acquisitions are more likely to earn above-average profits when the expected present value to the seller of continuing operations is low, e.g., because the seller needs funds, has capital limits, or has management weaknesses. Above-average profits also are more likely when the market for acquisitions is imperfect. For example, (1) the buyer may have better information, (2) there are few bidders, (3) the economy is weak, (4) the seller is weak, or (5) the seller has reasons to sell other than profit maximization. Moreover, the buyer may have a unique ability to operate the seller.

• Question 2:

  Entry into a new business may be made by internal development or acquisition. Entry through internal development usually involves creation of a full-fledged new business entity. The costs likely to be incurred by an internal entrant include: I.Investments to overcome entry barriers

  II. Change in the equilibrium level of supply and demand

  III. Lower prices charged by competitors

  IV.

  Higher marketing costs

  A.

  I and II only.

  B.

  I and IV only.

  C.

  II, Ill, and IV only.

  D.

  I, II, Ill, and IV.

  Correct Answer: D

  An internal entrant must cope with structural barriers and retaliation by existing firms. Costs incurred by the internal entrant include initial investments to overcome entry barriers (facilities, inventory, branding, technology, distribution channels, sources of materials, etc.), operating losses in the start-up phase, and the effects of retaliation (e.g., higher marketing costs, capacity expansion, or lower prices). Other costs include the price increases for factors of production that may result because of the new entry. Also, the capacity added to the industry by the entrant may affect the equilibrium level of supply and demand. The result may be additional competitive costs as firms with excess capacity cut prices.

• Question 3:

  What condition is most likely necessary to the success of a strategy of preemptive expansion?

  A. Competitors believe that the move is preemptive.

  B. The result is intense industry conflict.

  C. The firm does not know the expectations of competitors about the market.

  D. The learning-curve effect is small.

  Correct Answer: A

  Competitors must believe that the move is preemptive. Hence, the firm should know competitors' expectations about the market or be able to influence them favorably. Moreover, the preempting firm must have credibility, such as resources, technology, and a history of credibility, to support its statements and moves.

• Question 4:

  Which factor is most likely to limit expansion of a firm's productive capacity?

  A. Senior managers have production backgrounds.

  B. The firm operates in one industry.

  C. Current technology will soon be obsolete.

  D. Demand uncertainty is low.

  Correct Answer: C

  A firm's behavior may send signals to competitors that building is unwise. For example, it may announce an expansion project or indicate in some way that forecasts of demand are unfavorable or that current technology will soon be obsolete.

• Question 5:

  What governmental factor most likely will lead to overbuilding in a global industry?

  A. Tax incentives are given to local subsidiaries of foreign firms.

  B. The government favors an indigenous industry that has a small minimum efficient scale.

  C. Environmental regulations are imposed on domestic firms.

  D. Anti-bribery laws impede domestic firms from competing globally.

  Correct Answer: A

  Governmental factors may lead to overbuilding. For example, tax incentives may promote excess capacity by permitting foreign subsidiaries to pay no tax on earnings retained in the business. A nation also may wish to create an indigenous industry. When the minimum efficient scale is great in relation to world demand, the excess production in the country may contribute to global overcapacity. Furthermore, governmental employment pressures may result in overbuilding to create jobs or avoid job loss.

• Question 6:

  The managerial factor that may lead to overbuilding in an industry is:

  A. Management's belief that the career consequences of overcapacity appear to be more serious than those of under capacity.

  B. Management's production orientation.

  C. Inflation of expectations by industry buzz.

  D. Uncertainty caused by changes in industry structure.

  Correct Answer: B

  Management that is production-oriented may be more likely to overbuild than marketing-or finance- oriented management.

• Question 7:

  The competitive factor that may lead to overbuilding in an industry is:

  A. The need of large customers to know that capacity exists to meet their long-term requirements.

  B. A significant first mover advantage.

  C. The advantage held by the capacity leader.

  D. The existence of high entry barriers.

  Correct Answer: B

  First mover advantages may be significant. Thus, shorter lead times for ordering equipment, lower costs, and the ability to exploit an excess of demand over supply may encourage too many firms to expand.

• Question 8:

  The information flow factor that may lead to overbuilding in an industry is:

  A. The desire of firms able to add capacity to improve market share.

  B. The lack of a credible market leader.

  C. Effective market signaling.

  D. Management's expression of optimism to the financial community.

  Correct Answer: D

  The financial community plays a role in overbuilding when analysts criticize firms that have not expanded. Also, management's optimistic comments to the financial community may be taken as aggressive signals by competitors.

• Question 9:

  Which of the following is a structural factor that may lead to overbuilding in an industry?

  A. The need to add capacity in large increments.

  B. An increase in the minimum efficient scale of production.

  C. An increase in competitive pressure on the suppliers of the firm.

  D. Competitors are not integrated.

  Correct Answer: C

  Suppliers of capital, equipment, materials, etc., face their own competitive pressures. Thus, lower supplier prices, government subsidies, favorable interest rates, and similar incentives may promote expansion by customer industries.

• Question 10:

  A firm most likely will adopt a preemptive capacity expansion strategy when:

  A. Demand uncertainty is low.

  B. Large competitors have signaled their intention to expand.

  C. Excess industry capacity exists.

  D. Cash reserves are low.

  Correct Answer: A

  The extent of uncertainty about future demand is a crucial variable in determining the nature of industry expansion. For example, if uncertainty is great, firms willing to take greater risks because of their large cash resources or strategic stake in the industry will act first. Other firms will await events. When demand uncertainty is low, firms will tend to adopt a strategy of preemption, usually with strong market signals, to forestall competitors' expansion plans. Excess preemption leads to excess industry capacity because firms overestimate their competitive strengths, misunderstand market signals, or fail to accurately assess competitors' intentions.