If an Industry Earns a Return on Capital in Excess

question 15

Multiple Choice

If an industry earns a return on capital in excess of its cost of capital,

• A)incumbents will earn abnormal profit, and build entry barriers.
• B)the government needs to make sure that competition will increase.
• C)it is likely to attract the attention of firms looking to enter the industry, which may eventually lead to the return on capital falling.
• D)it will attract firms outside the industry, but the incumbents will have erected entry barriers.

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Definitions:

Indirect Method

A method used in cash flow statements to adjust net income for non-cash transactions and changes in working capital to arrive at operating cash flow.

Cash Flows

The complete sum of cash flowing in and out of a company, particularly influencing its ability to cover immediate expenses.

Investments

Assets purchased with the expectation that they will generate income or appreciate in value over time.

Net Income

The overall income of a business once every expense, such as operating costs and tax obligations, is deducted from gross revenue.