BUS 381 EXAM Review Questions with Verified
Correct Answers
what are the 3 traditional frameworks
accounting profitability, shareholder value creation, and economic value creation
Key considerations of traditional frameworks
ease of access to measures, ability to compare, and quality of the measure as a proxy of
performance
Key measures of accounting profitability
Return on invested capital, return on equity, return on assets, and return on revenue
Challenges of accounting profitability
snapshot data which is historical, consider what is not in the data (intangibles, off-balance sheet
items), and must be careful with comparison (who/when)
shareholder value creation
Risk capital (money provided for an equity share), total return to shareholders (stock price
appreiciation plus dividends) and market cap (dollar value of total shares outstanding)
shareholder value creation challenges
Macro factors (economy/wars/interest rates), Micro factors (Revenue growth/operational
efficiency), and volatility
Economic Value creation
the difference between a buyer's willingness to pay for a product/service and the firm's total
cost to produce it, the difference between value and cost
what are the 3 main components of economic value creation
Willingness to pay, price, and cost
Willingness to pay - price
consumer surplus
, price - cost
producer surplus
willingness to pay - cost
economic value creation
economic value creation challenges
measurement of consumer perception of value (changes over time and context), and must
aggregate to the firm level for competitive advantage comparison
Potential Traps of Performance
1. measuring against yourself 2. looking backward 3. putting your faith in numbers 4. gaming
your metrics 5. sticking to your numbers too long
measuring against yourself trap
challenges with the decision of who/what to compare to, look to ask outsiders for feedback
looking back trap
comparing to last years data may be limiting, look at qualitative data, communications, what
you aren't doing
putting your faith in numbers trap
easy to get lots of low quality data, look to qualitative or more wholistic data
gaming your metrics trap
metrics create incentives to meet them, even if not the way you want, look to multiple
metrics/varying the scope of what is measured
sticking to your numbers too long
"you manage what you measure", look to precision in measures and be clear about limitations
Competitive advantage in economic value creation
the gap between WTP and cost needs to be bigger than rivals gap, if you incrrease WTP it is
differentation, if you decrease cost its cost leadership
what is the purpose for businesses
creating value for customers and society rather than focusing strictly on short term shareholder
returns
Correct Answers
what are the 3 traditional frameworks
accounting profitability, shareholder value creation, and economic value creation
Key considerations of traditional frameworks
ease of access to measures, ability to compare, and quality of the measure as a proxy of
performance
Key measures of accounting profitability
Return on invested capital, return on equity, return on assets, and return on revenue
Challenges of accounting profitability
snapshot data which is historical, consider what is not in the data (intangibles, off-balance sheet
items), and must be careful with comparison (who/when)
shareholder value creation
Risk capital (money provided for an equity share), total return to shareholders (stock price
appreiciation plus dividends) and market cap (dollar value of total shares outstanding)
shareholder value creation challenges
Macro factors (economy/wars/interest rates), Micro factors (Revenue growth/operational
efficiency), and volatility
Economic Value creation
the difference between a buyer's willingness to pay for a product/service and the firm's total
cost to produce it, the difference between value and cost
what are the 3 main components of economic value creation
Willingness to pay, price, and cost
Willingness to pay - price
consumer surplus
, price - cost
producer surplus
willingness to pay - cost
economic value creation
economic value creation challenges
measurement of consumer perception of value (changes over time and context), and must
aggregate to the firm level for competitive advantage comparison
Potential Traps of Performance
1. measuring against yourself 2. looking backward 3. putting your faith in numbers 4. gaming
your metrics 5. sticking to your numbers too long
measuring against yourself trap
challenges with the decision of who/what to compare to, look to ask outsiders for feedback
looking back trap
comparing to last years data may be limiting, look at qualitative data, communications, what
you aren't doing
putting your faith in numbers trap
easy to get lots of low quality data, look to qualitative or more wholistic data
gaming your metrics trap
metrics create incentives to meet them, even if not the way you want, look to multiple
metrics/varying the scope of what is measured
sticking to your numbers too long
"you manage what you measure", look to precision in measures and be clear about limitations
Competitive advantage in economic value creation
the gap between WTP and cost needs to be bigger than rivals gap, if you incrrease WTP it is
differentation, if you decrease cost its cost leadership
what is the purpose for businesses
creating value for customers and society rather than focusing strictly on short term shareholder
returns
