WPC 480 Quiz 2 UPDATED ACTUAL
Questions and CORRECT Answers
Three Standard Performance Dimensions - CORRECT ANSWER - 1. What is the firm's
ACCOUNTING PROFITABILITY?
2. How much SHAREHOLDER VALUE does the firm create?
3.How much ECONOMIC VALUE does the firm generate?
Since competitive advantage is defined as superior performance RELATIVE to other competitors
in the same industry or the industry average, a firm's managers must be able to accomplish two
critical tasks: - CORRECT ANSWER - 1. Accurately assess the performance of their firm.
2. Compare and benchmark their firm's performance to other competitors in the same industry or
against the industry average.
(ROIC) Return on investment capital= - CORRECT ANSWER - ROIC=(Net profits/
Invested capital)
*Popular metric because it is a good proxy for FIRM PROFITABILITY
*The ratios measures how effectively a company uses it TOTAL INVESTED CAPITAL
Total Invest Capital, consists of two components: - CORRECT ANSWER - 1.
SHAREHOLDERS' EQUITY through the selling of share to the public
2. INTEREST-BEARING DEBT through borrowing from financial institutional bondholders
, Rule of thumb for ROIC (Return on investment capital) - CORRECT ANSWER - If a
firm's ROIC is greater than its cost of capital, it generate value:
If it is less than the cost of capital, the firm destroys value
Return on Revenue (ROR)= - CORRECT ANSWER - (Net profits/revenue)
Working Capital Turnover= - CORRECT ANSWER - (Revenue/ Working Capital)
Return on Revenue (ROR) three financial rations: - CORRECT ANSWER - -Cost of
goods sold (COGS) / Revenue.
*Indicates how efficiently a company product a good
- Research & development (R&D) expense / Revenue.
*Indicates how much of each dollar that the firm earns in sales in invested in sales, general, and
administrative expenses
- Selling, general, & administrative (SG&A) expense / Revenue.
Second Component of ROIC: WORKING CAPITAL TURNOVER - CORRECT
ANSWER - A measure of how effectively capital is being used to generate revenue
Higher ratios of RECEIVABLES TURNOVER (revenue/ accounts receivable) imply: -
CORRECT ANSWER - More efficient management in collecting receivable and short
durations of interest-free loans to customers (i.e. time until payments are due)
Payables turnover (revenue/accounts payable) Indicates: - CORRECT ANSWER - How
fast the firm is paying its creditors and how much it benefits from interest-free loan extended by
its suppliers
Questions and CORRECT Answers
Three Standard Performance Dimensions - CORRECT ANSWER - 1. What is the firm's
ACCOUNTING PROFITABILITY?
2. How much SHAREHOLDER VALUE does the firm create?
3.How much ECONOMIC VALUE does the firm generate?
Since competitive advantage is defined as superior performance RELATIVE to other competitors
in the same industry or the industry average, a firm's managers must be able to accomplish two
critical tasks: - CORRECT ANSWER - 1. Accurately assess the performance of their firm.
2. Compare and benchmark their firm's performance to other competitors in the same industry or
against the industry average.
(ROIC) Return on investment capital= - CORRECT ANSWER - ROIC=(Net profits/
Invested capital)
*Popular metric because it is a good proxy for FIRM PROFITABILITY
*The ratios measures how effectively a company uses it TOTAL INVESTED CAPITAL
Total Invest Capital, consists of two components: - CORRECT ANSWER - 1.
SHAREHOLDERS' EQUITY through the selling of share to the public
2. INTEREST-BEARING DEBT through borrowing from financial institutional bondholders
, Rule of thumb for ROIC (Return on investment capital) - CORRECT ANSWER - If a
firm's ROIC is greater than its cost of capital, it generate value:
If it is less than the cost of capital, the firm destroys value
Return on Revenue (ROR)= - CORRECT ANSWER - (Net profits/revenue)
Working Capital Turnover= - CORRECT ANSWER - (Revenue/ Working Capital)
Return on Revenue (ROR) three financial rations: - CORRECT ANSWER - -Cost of
goods sold (COGS) / Revenue.
*Indicates how efficiently a company product a good
- Research & development (R&D) expense / Revenue.
*Indicates how much of each dollar that the firm earns in sales in invested in sales, general, and
administrative expenses
- Selling, general, & administrative (SG&A) expense / Revenue.
Second Component of ROIC: WORKING CAPITAL TURNOVER - CORRECT
ANSWER - A measure of how effectively capital is being used to generate revenue
Higher ratios of RECEIVABLES TURNOVER (revenue/ accounts receivable) imply: -
CORRECT ANSWER - More efficient management in collecting receivable and short
durations of interest-free loans to customers (i.e. time until payments are due)
Payables turnover (revenue/accounts payable) Indicates: - CORRECT ANSWER - How
fast the firm is paying its creditors and how much it benefits from interest-free loan extended by
its suppliers
