BUS 450 - Chapter 8 (Warm-up and Quiz)

Successful strategy implementation

1. requires additional capital beyond net income from operations or the sale of assets 2. Determining an appropriate mix of debt and equity in a firm's capital structure is an important strategy-implementation decision 3. Theoretically, an enterprise should carry enough debt in its capital structure to boost its return on investment in projects earning more than the cost of the debt 4. EPS is an excellent measure of organizational performance

Most financial institutions require ______ of projected financial statements whenever a business seeks capital.

3 years Reasoning: Most financial institutions require 3 years of projected financial statement whenever a business seeks capital

Regarding corporate​ valuation, a conservative rule of thumb is to establish a​ business's worth as​ ______ times the​ firm's current annual profit. A. 5 B. 3 C. 10 D. 12 E. 6

A. 5

The top 20 most valuable college football programs are listed in the chapter in terms of their monetary value. What team is most​ valuable? A. Ohio State Buckeyes B. Notre Dame Fighting Irish C. Michigan Wolverines D. Texas Longhorns E. Alabama Crimson Tide

A. Ohio State Buckeyes

Which​ statement(s) below is​ TRUE? A. Seeing Goodwill regularly increasing on a balance sheet is not a good thing. B. Intangibles increase when treasury stock increases. C. Goodwill is the same term often used for intangibles. D. Goodwill cannot decrease on balance sheet from one year to the next. E. FASB Rule 16 requires companies to admit once a year whether the premiums they paid for​ acquisitions, called​ goodwill, were a waste of money.

A. Seeing Goodwill regularly increasing on a balance sheet is not a good thing

According to Table​ 8-5 in Chapter​ 8, what are the three most corrupt countries in the​ world? A.​ Somalia, South​ Sudan, North Korea B.​ Vietnam, Thailand, Somalia C.​ Iraq, Iran, Syria D.​ Congo, Somalia, Libya E. ​Syria, Somalia, Libya

A. Somalia, South Sudan, North Korea

Which​ statement(s) is​ TRUE? A. Sometimes firms will increase their Treasury Stock near the end of the​ quarter, or near the end of the​ year, to inflate their EPS​ "artificially". B. Balance sheets will not balance if retained earnings are negative. C. In developing projected financial​ statements, the retained earnings row is used as the plug figure. D. New equity issued in a given year goes on the treasury stock row on a balance sheet. E. Another name for the balance sheet account—​additional-paid-in-capital—is treasury stock.

A. Sometimes firms ill increase their Treasury Stock near the end of the quarter, or near the end of the year, to inflate their EPS "artificially"

Limitations of​ EPS/EBIT analysis include​ ______. A. timing and control B. lack of control C. dividends and EPS ranges D. lack of diversity E. continuity and ratio analysis

A. Timing and Control

Is it true or false that the free Excel strategic planning template at www.strategyclub.comopens in a new tab will automatically balance your projected balance​ sheets, but​ 1) you likely will need to make adjustments to the cash​ account, and​ 2) the template does not automatically balance your existing balance​ sheets, i.e. once you enter your​ firm's financial statements into the template​ format, you will need to make adjustments as needed. A. True B. Sometimes true C. This issue varies for profit versus nonprofit organizations D. Sometimes false E. False

A. True

What formula below is correct for valuing a company using the​ price-earnings ratio​ method? A. Divide the market price of the​ firm's common stock by the​ firm's current ratio and multiply this number by the​ firm's average net income for the past 5 years. B. Divide the market price of the​ firm's common stock by the annual earnings per share​ (EPS) and multiply this number by the​ firm's average net income for the past 5 years. C. Divide the market price of the​ firm's common stock by the​ firm's debt-to-equity ratio and multiply this number by the​ firm's average net income for the past 5 years. D. Divide the market price of the​ firm's common stock by the annual earnings per share​ (EPS) and multiply this number by the​ firm's average revenue for the past 5 years. E. Divide the market price of the​ firm's common stock by the annual earnings per share​ (EPS) and multiply this n

B. Divide the market price of the​ firm's common stock by the annual earnings per share​ (EPS) and multiply this number by the​ firm's average net income for the past 5 years.

Goodwill on the balance sheets of​ S&P 500 firms changed from​ $1.7 trillion in 2007 to how much in​ 2017? A.​ $25 trillion B.​ $5 trillion C.​ $3 trillion D.​ $1 trillion E. ​$10 trillion

C. $3 Trillion

​Theoretically, how much debt should a company carry on its balance​ sheet? A. An enterprise should carry enough debt in its capital structure to keep its debt total lower than its equity total. B. An enterprise should carry enough debt in its capital structure to keep its debt total lower than its net income. C. An enterprise should carry enough debt in its capital structure to boost its return on investment in projects earning more than the cost of the debt. D. An enterprise should carry enough debt in its capital structure to keep its debt total lower than its cash total. E. An enterprise should carry enough debt in its capital structure to keep its debt total lower than its retained earnings total.

C. An enterprise should carry enough debt in its capital structure to boost its return on investment in projects earning more than the cost of the debt.

A​ full-blown example of a projected financial statement analysis is worked out and presented in Chapter 8 for​ _____. A. Facebook B. 3M Corp C. ​P&G D. LinkedIn E. ​BB&T

C. P&G

Chapter 8's exemplary strategist, Jamie Dimon, CEO of JP Morgan, says successful strategic planning has more to do with heart than mind. What does Dimon say this means? A. Value your own expertise and experiences more than the expertise and experiences of others. B. Recognize people; admit they have all the answers. C. Provide people a platform to which they can contribute. D. Applaud people for preserving harmony by not speaking. E. Employees are the backbone of all firms.

C. Provide people a platform to which they can contribute

Which of the following statements is TRUE regarding the issuance of corporate bonds in the United​ States? A. The practice of firms issuing bonds to buy back their own stock and to pay cash dividends to shareholders is illegal. B. Firms issue bonds to finance​ acquisitions, to buy back their own stock​ (called preferred stock​), and to refinance old debt. C. The year 2017 was the seventh straight year that a record dollar value of bonds was sold in the United​ States, totalling more than​ $1.5 trillion. D. A large recent bond transaction was​ Anheuser-Busch InBev's​ $4 billion bond issuance to purchase SAB Miller. E. Bonds were discontinued for use in the United States.

C. The year 2017 was the seventh straight year that a record dollar value of bonds was sold in the United States, totalling more than $1.5 trillion.

To expand nationally, the businesses in the video would need to understand more about their valuation in order to implement financial strategies successfully. Which of the following is TRUE about corporate valuation?

Corporate valuation is not an exact science

Chapter 8's exemplary strategist, Jamie Dimon, CEO of JP Morgan, is a big advocate for economies of scale. What does Dimon advice regarding this? A. Rising economies of scale produce rising stock prices. B. Growth for the sake of growth is a good strategy. C. Firms should deploy resources into areas that hold economies of scale steady because this is often more advantageous to customers, shareholders, and ultimately for the entire economy. D. Firms should be careful not to venture into areas outside their corporate strategy. E. Economies of scale are less important than benchmarking.

D. Firms should be careful not to venture into areas outside their corporate strategy

In developing projected financial statements, with what row item does one start? A. Earnings B. Cash C. Cost of Goods Sold D. Revenues E. Cost of Goods Stole

D. Revenues

The shares of stock of a firm that are owned by the firm itself are called​ _____. A. retained earnings B. goodwill C. convertible stock D. treasury stock E. preferred stock

D. Treasury Stock

In performing EPS/EBIT analysis, how is the first row (EBIT) determined? A. Use the most recent year Revenues number plus or minus the impact of recommendations to determine a range. B. Use the most recent year EPS number plus or minus the impact of recommendations to determine a range. C. Use the most recent year Cash number plus or minus the impact of recommendations to determine a range. D. Use the most recent year EBIT number plus or minus the impact of recommendations to determine a range. E. Use the most recent year Retained Earnings number plus or minus the impact of recommendations to determine a range.

D. Use the most recent year EBIT number plus or minus the impact of recommendations to determine a range

Which statement below is​ TRUE? A. ​"Going public" is not recommended for companies with less than​ $100 million in sales because the initial costs can be too high for the firm to generate sufficient cash flow to make going public worthwhile. B. ​Increasingly, companies are using treasury stock to buy back their own stock and to pay cash dividends to shareholders. This has become a concern. C. Many firms prefer to leave their cash outside in Bermuda banks if it was earned outside the United States. To use those funds to pay dividends or purchase treasury​ stock, for​ example, would trigger a big U.S. corporate income tax payment. D. ​"Going public" means selling off a percentage of a company to others to raise​ capital; consequently, it dilutes the​ owners' control of the firm. E. In some income​ statements, another name for earnings is revenues.

D. ​"Going public" means selling off a percentage of a company to others to raise​ capital; consequently, it dilutes the​ owners' control of the firm.

In developing projected financial​ statements, how are retained earnings calculated on the balance​ sheet? A. Use a percentage of sales methods based on the prior 3 years. B. Use retained earnings as the plug figure to make the balance sheet balance. C. Add the net income to the prior​ year's retained earnings. D. Use a percentage of sales method based on the prior 3 years coupled with the​ company's strategies. E. Add the net income less dividends to the prior​ year's retained earnings.

E. Add the net income less dividends to the prior year's retained earnings

Who is a big advocate for economies of​ scale, arguing that growth for the sake of growth is a misguided​ strategy? He suggests firms should be careful not to venture into areas outside their corporate​ strategy; instead, they should deploy resources into areas that will build economies of scale. A. CEO of Tesla - Elon Musk B. Economist Milton Friedman C. President Donald Trump D. CEO of Apple - Tim Cook E. CEO of JPMorgan - Jamie Dimon

E. CEO of JPMorgan - Jamie Dimon

In what way mentioned below would retained earnings on the balance sheet decrease from one year to the​ next? A. If the firm has a negative capital surplus B. If the firm had zero net income for the year and pays no dividends C. If the firm has negative​ paid-in-capital D. If the firm has cash or liquidity problems E. If the firm had positive net income for the year but pays out dividends greater than the net income

E. If the firm had positive net income for the year but pays out dividends greater than the net income

The corporate valuation formula for the net worth method is​ _____. A. additional paid in capital plus retained earnings minus​ (goodwill +​ intangibles) B. total​ owners' equity​ (SE) plus​ (goodwill +​ intangibles) C. net worth plus retained earnings plus​ (goodwill +​ intangibles). D. additional paid in capital plus retained earnings minus​ (goodwill -​ intangibles) E. total​ shareholders' equity​ (SE) minus​ (goodwill +​ intangibles).

E. total​ shareholders' equity​ (SE) minus​ (goodwill +​ intangibles).

Assume the New Leaf Floral Shop is unique enough to require outside investors. Outside investors would most likely perform what type of analysis to determine the proper capital structure needed?

EPS/EBIT analysis

What is another term for​ profits? A. Earnings B. Past Income C. Revenue D. Future income E. Net revenue

Earnings

What is the fourth and final step of an EPS/EBIT analysis?

Graph the analysis Reasoning: There are four steps of an ETS/EBIT analysis. First, gather the data to be inputted. Second, set up a computation table. Third, insert numbers in the table. Last, graph the analysis.

When a firm buys more of its own common stock, what is the effect on the firm's earnings per share (EPS) value?

It goes up

Earnings Before Interest and Taxes (EBIT)

Net income before income tax expense and interest expense is deducted. This is a common way to compare the earning power of companies because it eliminates the impact of capital structure and effective tax rates, two non-operating factors.

In today's business environment, a company like New Leaf may expand such that it is either acquired or offered an opportunity to merger with a company like Amazon or 1-800-Flowers. What would be one of the initial items a corporate analyst might want to know about the company?

New Leaf's corporate value

Which valuation method is most feasible for small business evaluation?

The Net Income Method Reason: The Net Income Method for measuring the monetary value of a company grows out of the belief that the worth of any business should be based largely on the future benefits its owners may derive through net profits. In general, this method is more feasible for small business evaluation.

A small business, like the floral shop mentioned in the video, wants to expand, so it applies for a bank loan. The bank would commonly want to examine which of the key indicators of financial health?

The shop's proportion of debt and equity

In​ EPS/EBIT analysis, from where does the tax rate percentage​ come? A. Use the​ company's prior year tax rate as revealed by dividing income before taxes by taxes paid off the​ firm's cash flow statement. B. Use the respective​ country's federal income tax rate. C. Estimate the​ company's future tax rate based on the​ company's strategies. D. Just use 10 percent for all financing options to better examine impact of debt versus stock options for raising capital. E. Use the​ company's prior year tax rate as revealed by dividing income before taxes by taxes paid off the​ firm's income statement.

Use the company's prior year tax rate as revealed by dividing income before taxes by taxes paid off the firm's income statement

Under which of the following conditions can issuing bonds be an effective way to raise capital?

When a​ company's balance sheet is strong Reasoning: A popular way for a company to raise capital is to issue corporate bonds, which is an analogous to going to the bank and borrowing money except that with bonds, the company obtains the funds from investors rather than banks. Especially when a company's balance sheet is strong and its credit rating is excellent, issuing bonds can be an effective way to raise needed capital. On a balance sheet, bonds are included in the long-term debt row.

Many practitioners and students of strategic planning use which of the following to develop existing and projected financial statements?

an Excel template provided by www.strategyclub.com Reasoning: Many practitioners and students of strategic planning use the free Excel strategic planning template at www.strategyclub.com to develop existing and projected financial statements to reveal the expected impact of proposed recommendations for a firm

Earnings Before Tax (EBT)

another term for earnings is profits or net income

Corporate valuation ______.

can use different valuation​ methods, which will yield different results Reasoning: Corporate valuation is not an exact science; value is sometimes in the eye of the beholder. The valuation of a firm's worth is based on financial facts, but common sense and good judgment enter the process because assigning a monetary value to some factors that may not be fully reflected in a firm's financial statements is difficult. Also, different valuation methods will yield different totals for a firm's worth. Evaluating the worth of a business truly requires both qualitative and quantitative skills.

EPS/EBIT analysis is used to​ ______.

determine the appropriate mix of debt and equity in a​ firm's capital structure Reasoning: Two primary sources of capital are debt and equity. Determining an appropriate mix of debt and equity in a firm's capital structure is an important strategy-implementation decision. EPS/EBIT analysis is a widely used technique for determining whether debt, stock, or a combination of the two is the best alternative for raising capital to implement strategies.

The video discusses several ways businesses like New Leaf can raise capital or funding. An initial step for either an investor or the business is to _______.

evaluate the worth of the business

Projected financial statements are ______ and are important because ______

income statements and balance sheets developed for future years to forecast the potential impact of various recommendations proposed for implementation Allows firms to forecast the expected financial results of various strategies and approaches Most financial institutions require 3 years of projected financial statements whenever a business seeks capital

Moving a company from being private to being public ______.

is an IPO Reasoning: An Initial Public Offering (IPO) moves a company from being private to being public

Earnings per Share (EPS(

net income divided by number of shares outstanding

Shares authorized

the number of shares a firm has approval to issue in total

EPS/EBIT analysis is used for what?

widely used technique for determining whether debt, stock, or a combination of the two is the best alternative for raising capital to implement strategies