I understand the correct answers, but WHY doesn’t the CFA say why the other answers are wrong… For instance: #40 - C “extention of payment terms from suppliers” - why isn’t that right? If you are paying less in COGS or SG&A, the profitability increases, and CFO increases - right? #41 - A “Current Ratio” - You are paying less because A/P is increasing, so your current assets (cash) increase. Your A/P is increasing, so your current liabilities (A/P) increase. Last time I checked when both the numerator and denominator go up the same amount, the ratio INCREASES. #56 - I don’t agree with this answer. How can there be 313 equivalent firms of the SAME SIZE when the 10 FIRM CONCENTRATION RATIO IS 20% !!! That makes no sense. And the book is no help in this either… This is BS.
lol
for 40, the CFO doesnt increase because you dont pay your payables until later. That is simply idle cash in current assets. CFO represents cash coming in and going out in operations. The interest one is right because capitalizing it removes the expense from CFO and into CFI for 41, If you have a current ratio over 1 and you add the same amount to both numerator and denominator, then the CR is going to decrease
Regarding #40, extending payment terms does NOT increase profitability. That is the point of analyzing accruals. Just because you have more time to pay suppliers, ie 60 days instead of 30 doesn’t mean you didn’t incur the cost (on an income statement basis). The 2 ratios she is assuming are NI and CFO based. Extending payment terms would help with the latter, but not NI. This is why in #41, your CFO has increased. Extended payment terms means your working capital needs are less, ie you didn’t have to fork out the cash (yet), thus CFO is (for now) higher.
Oh yea, regarding 56… it’s a bit tricky but the key word in the answer choice is that it says “firms of the same size” In general, you can’t figure out the number of firms based on the HI index alone. But if you make the assumption that each firm has the same market share (here “market share” and “size” are being used synonymously)… we can deduce that the # of firms is simply the inverse of the HI index. Remember HI = (mkt share)^2 x N N = number of firms If we assume, each firm has the same market share, then market share is simply 1/N. For example, 100 firms with equal market share is 1/100 = 1%, they all have 1% each. So replace market share = 1/N in the equation and you get HI = (1/N)^2 x N HI = 1/N 0.0032 = 1/N N = 312.5
Also you could qualitatively conclude that because the top 10 firms only have 20%, it’s relatively low concetration so A nor C (oligopolistic) are correct.
yabbadabbadoo Wrote: ------------------------------------------------------- > Oh yea, regarding 56… it’s a bit tricky but the > key word in the answer choice is that it says > “firms of the same size” > > In general, you can’t figure out the number of > firms based on the HI index alone. But if you make > the assumption that each firm has the same market > share (here “market share” and “size” are being > used synonymously)… we can deduce that the # of > firms is simply the inverse of the HI index. > > Remember HI = (mkt share)^2 x N > > N = number of firms > > If we assume, each firm has the same market share, > then market share is simply 1/N. For example, 100 > firms with equal market share is 1/100 = 1%, they > all have 1% each. > > So replace market share = 1/N in the equation and > you get > > HI = (1/N)^2 x N > HI = 1/N > 0.0032 = 1/N > N = 312.5 I get that - but yabba, what about the fact that it states the “10 FIRM CONCENTRATION RATIO IS 20%” Then there is no way you could have 313 equivalent firms of the same size!
PistolPt Wrote: ------------------------------------------------------- > yabbadabbadoo Wrote: > -------------------------------------------------- > ----- > > Oh yea, regarding 56… it’s a bit tricky but > the > > key word in the answer choice is that it says > > “firms of the same size” > > > > In general, you can’t figure out the number of > > firms based on the HI index alone. But if you > make > > the assumption that each firm has the same > market > > share (here “market share” and “size” are being > > used synonymously)… we can deduce that the # > of > > firms is simply the inverse of the HI index. > > > > Remember HI = (mkt share)^2 x N > > > > N = number of firms > > > > If we assume, each firm has the same market > share, > > then market share is simply 1/N. For example, > 100 > > firms with equal market share is 1/100 = 1%, > they > > all have 1% each. > > > > So replace market share = 1/N in the equation > and > > you get > > > > HI = (1/N)^2 x N > > HI = 1/N > > 0.0032 = 1/N > > N = 312.5 > > I get that - but yabba, what about the fact that > it states the “10 FIRM CONCENTRATION RATIO IS > 20%” > > Then there is no way you could have 313 equivalent > firms of the same size! pistol, this is my first time and i dunno if i am ready for it. could you please tell me how you handled that “fail”? I want to get ready for the worst…you will pass this time for sure.
Right, I was just more pointing out… THIS is how you solve for 313, and worst case if you can’t figure that out, you can sorta eliminate the other choices by knowing that 10 Firm Concentration of 20% means Low Concentration. At the risk of stating the obvious, that last line means the Top 10 Firms (in total) only represent 20% of the market cap of the industry. To me, in the context of a monopoly, 10 firms is already a large # and yet that only equals 20% so surely it’s NOT a monopoly… Regarding what you perceive as a contradiction, the answer is not saying it IN FACT definitely 100% has 313 companies… but approximately, so think “on average” which is then possible…