CBA 469 Exam 2 With Correct
Solution
The three standard performance dimensions include: - ANSWER What is the firm's
accounting profitability?
How much shareholder value does the firm create?
How much economic value does the firm generate?
Why is accounting profitability important? - ANSWER Accurately assesses firm
performance
Compares firm performance to competitors/industry average
Why is accounting profitability used? - ANSWER To have an "apples to apples"
comparison versus every firm using their own methods
ROIC(Return on Invested Capital) formula: - ANSWER NOPAT/ (Total Stockholders'
Equity + Total Debt - Value of Preferred Stock
Return on revenue is: - ANSWER How much of the firm's sales is converted into profits
COGS (costs of goods sold)/ revenue measures what? Should the number be high or
low? - ANSWER How efficiently a company can produce a good. Low.
R&D expense/ revenue measures what? Should the number be high or low? - ANSWER
How much of each dollar earned is invested in R&D. Low.
SG&A expense/ revenue measures what? Should the number be high or low? - ANSWER
How much of each dollar earned is invested in SG&A. Low.
Working capital turnover is: - ANSWER How effectively capital is being used to generate
revenue
Why is a higher working capital turnover a good thing? - ANSWER Because it means you
either have higher revenues or your working capital investments are returning good
results.
Working capital/ revenue measures what? Should the number be high or low? - ANSWER
How much working capital the firm has tied up in its operations. High.
PPE/ revenue measures what? Should the number be high or low? - ANSWER How much
of a firm's revenues are dedicated to cover plant, property, and equipment. Low.
, Intangibles/ revenue measure what? Should the number be high or low? - ANSWER How
much money is going towards patents, copyrights, trademarks, etc. Low.
What are the limitations of accounting? - ANSWER Historical and backward-looking
Does not consider off-balance sheet items:
Focuses mainly on tangible assets
Shareholders: - ANSWER People who own shares of stock, are legal owners
Risk capital: - ANSWER Money provided for an equity share
Total return to shareholders: - ANSWER Stock price appreciation + dividends
Market capitalization: - ANSWER Dollar value of total shares outstanding, number of
outstanding shares x share prices
Limitations of shareholder value creation include: - ANSWER Stock prices can be
volatile, macroeconomic factors affect stock prices, and stock prices can reflect the
mood of investors.
Economic value creation is the difference between: - ANSWER value (V) and cost (C).
Producer surplus: - ANSWER Price charged minus the cost to produce.
Consumer surplus: - ANSWER What you were willing to pay minus what you paid.
V = - ANSWER Total Perceived Consumer Benefits = Consumer's Maximum Willingness
to Pay = Reservation Price
(V-C) = - ANSWER Value created
C = - ANSWER Firm's cost
(V-P) = - ANSWER Consumer surplus
(P-C) = - ANSWER Firm's profit
What are the limitations of economic value creation? - ANSWER Valuing a customer
good isn't easy.
The value of good changes in the eyes of consumers.
What is the balanced scorecard used for? - ANSWER Helping managers achieve their
strategic objectives.
Under the balanced scorecard approach, competitive advantage is achieved by
recognizing what? - ANSWER How customers view us
How shareholders view us
Solution
The three standard performance dimensions include: - ANSWER What is the firm's
accounting profitability?
How much shareholder value does the firm create?
How much economic value does the firm generate?
Why is accounting profitability important? - ANSWER Accurately assesses firm
performance
Compares firm performance to competitors/industry average
Why is accounting profitability used? - ANSWER To have an "apples to apples"
comparison versus every firm using their own methods
ROIC(Return on Invested Capital) formula: - ANSWER NOPAT/ (Total Stockholders'
Equity + Total Debt - Value of Preferred Stock
Return on revenue is: - ANSWER How much of the firm's sales is converted into profits
COGS (costs of goods sold)/ revenue measures what? Should the number be high or
low? - ANSWER How efficiently a company can produce a good. Low.
R&D expense/ revenue measures what? Should the number be high or low? - ANSWER
How much of each dollar earned is invested in R&D. Low.
SG&A expense/ revenue measures what? Should the number be high or low? - ANSWER
How much of each dollar earned is invested in SG&A. Low.
Working capital turnover is: - ANSWER How effectively capital is being used to generate
revenue
Why is a higher working capital turnover a good thing? - ANSWER Because it means you
either have higher revenues or your working capital investments are returning good
results.
Working capital/ revenue measures what? Should the number be high or low? - ANSWER
How much working capital the firm has tied up in its operations. High.
PPE/ revenue measures what? Should the number be high or low? - ANSWER How much
of a firm's revenues are dedicated to cover plant, property, and equipment. Low.
, Intangibles/ revenue measure what? Should the number be high or low? - ANSWER How
much money is going towards patents, copyrights, trademarks, etc. Low.
What are the limitations of accounting? - ANSWER Historical and backward-looking
Does not consider off-balance sheet items:
Focuses mainly on tangible assets
Shareholders: - ANSWER People who own shares of stock, are legal owners
Risk capital: - ANSWER Money provided for an equity share
Total return to shareholders: - ANSWER Stock price appreciation + dividends
Market capitalization: - ANSWER Dollar value of total shares outstanding, number of
outstanding shares x share prices
Limitations of shareholder value creation include: - ANSWER Stock prices can be
volatile, macroeconomic factors affect stock prices, and stock prices can reflect the
mood of investors.
Economic value creation is the difference between: - ANSWER value (V) and cost (C).
Producer surplus: - ANSWER Price charged minus the cost to produce.
Consumer surplus: - ANSWER What you were willing to pay minus what you paid.
V = - ANSWER Total Perceived Consumer Benefits = Consumer's Maximum Willingness
to Pay = Reservation Price
(V-C) = - ANSWER Value created
C = - ANSWER Firm's cost
(V-P) = - ANSWER Consumer surplus
(P-C) = - ANSWER Firm's profit
What are the limitations of economic value creation? - ANSWER Valuing a customer
good isn't easy.
The value of good changes in the eyes of consumers.
What is the balanced scorecard used for? - ANSWER Helping managers achieve their
strategic objectives.
Under the balanced scorecard approach, competitive advantage is achieved by
recognizing what? - ANSWER How customers view us
How shareholders view us
