Ch .5 Practice test

________ is best described as a measure of how effectively capital is being used by a firm to generate revenue.

working capital turnover

The tenet behind the triple-bottom-line is that

C) a firm should achieve positive results along the economic, social, and ecological dimensions to gain a sustainable strategy.

Elena is the CEO of Geode Technologies, a consumer electronics manufacturer. Last year, Geode's return on invested capital (ROIC) was 11.6 percent, while Geode's closest competitor, NorthWest Tech, had an ROIC of 17 percent. Which of the following factors might Elena use to convince investors to invest in Geode rather than NorthWest Tech?

Geode's intangible intensity was 6 percent, while NorthWest Tech's was 3 percent.

Which of the following is a disadvantage of measuring firm performance through total return to shareholders and firm market capitalization?

Market volatility makes it difficult to assess firm performance through these measures, particularly in the short-term.

The balance scorecard can accomodate

both short and long term performance metrics

The value a consumer attaches to a product or service is captured in the

consumer's maximum willingness to pay

Competitive advantage goes to the firm that achieves the

largest economic value created.

Both Saturn Technologies and Granite Inc. incur a cost of $200 to manufacture a single unit of a cell phone. However, Saturn Technologies charges a higher price than Granite Inc. does, but it still sells a higher number of phones. What does this imply?

) Saturn Technologies creates more economic value than Granite Inc. does.

During the process of formulating an effective business model, a firm's managers should first

A) transform their strategy of how to compete into a blueprint of actions and initiatives.

81) A defining characteristic of the pay-as-you-go business model is that the A) users pay for only the services they consume. B) users pay for access to a product or service whether they use it during the payment term or not. C) initial product is often sold at a loss in order to drive demand for complementary goods. D) the basic features of a service are provided free of charge, but the user must pay for premium services.

A.

26) Return on risk capital primarily includes A) stock price appreciation plus dividends received over a specific period. B) consumer surplus plus firm profit. C) account receivables plus account payables. D) economic value created by a firm plus reservation price.

A. stock price appreciation

59) Which of the following is an advantage of the balanced-scorecard? A) It is a tool for both strategic formulation and strategic implementation. B) It allows managers to translate a firm's vision into measureable operational goals. C) The balanced-scorecard is independent of the skills of the managers responsible for its implementation. D) Its implementation is a one-time effort and does not require continuous tracking of metrics or updating of strategic objectives.

B.

37) A watchmaking company has priced one of its wristwatches at $210. Most of its competitors sell similar watches at $180. Selling anything less than $150 would result in a loss for the company. However, the absolute maximum a customer is willing to pay for it is $170. In this scenario, what is the reservation price of the wristwatch? A) $150 B) $180 C) $170 D) $210

C) The absolute maximum a customer would be willing to pay for a product is referred to as its reservation price, which in this case is $170.

You are the CEO of a home appliance manufacturing company and have recently undertaken a review of your company's strategy. In comparing your stock market valuation to that of your closest competitor, you note that your firm is currently valued at $50 billion, while your competitor is valued at $40 billion. How should you proceed?

Compare the current valuations with past valuations to determine a trend.

What is a disadvantage of balanced-scorecard approach

It provides limited guidance about which metrics to choose.

Which of the following is an advantage of a triple-bottom-line approach?

The approach takes an integrative and holistic view in assessing a company's performance.

The efficient market hypothesis suggests that the market price of a firm's stock is an objective indicator of a firm's past, current, and expected future performance.

True - this is embedded in the market price of firm stock

29) The market capitalization of a public company is $5 billion. Each share of the company is traded at $200. What do you infer from this financial data? A) The firm's number of outstanding shares is 25 million. B) The firm pays an annual dividend of 10 percent. C) The firm's total return to shareholder is $5 billion. D) The firm's economic value created is $5 billion.

a

25) From an investors' or shareholders' perspective, the measure of competitive advantage that matters most is the A) return on risk capital. B) economic value created. C) consumer surplus. D) inventory turnover.

a) - what they connote recover if firm goes bankrupt

Which of the following frameworks used to measure competitive advantage relies on both an internal and an external view of a firm?

balanced scorecard model

28) A firm has 30 million shares outstanding, and each share is traded at $100. Also, each shareholder gets a dividend of $2,000 annually. In this case, the market capitalization is A) 30,000 shares, that is, 30 million shares/$100. B) $200,000, that is, $2,000 × $100. C) $3 billion, that is, 30 million shares × $100. D) 20:1, that is, $2,000/$100.

c) Market cap = Number of outstanding shares × Share price)

In an economic context, strategy for producers is primarily about

capturing the economic value created as much as possible.

Which of the following competitively important assets is typically excluded from a firm's balance sheet?

customer experience

Which of the following is an external performance metric? A) return on revenue B) fixed assets turnover C) inventory turnover D) total return to shareholders

d)

A firm incurs $400 to manufacture a television. In the market, customers are willing to pay a maximum of $600 for the television priced at $500. The difference of $200 ($600 minus $400) is the

economic value created.

Which of the following statements is true of the balanced-scorecard?

it attempted to proved a holistic perspective

A high percentage of R&D/Revenue ratio indicates a(n)

strong focus on innovation to improve current products and services

63) Which of the following approaches to assess competitive advantage is based on the view that noneconomic factors can have a significant impact on a firm's financial performance?

triple-bottom line approach economic, social, and ecological concerns

________ are the legal owners of public companies.

shareholders

How can one company achieve a competitive advantage over the other? A) Increase total perceived consumer benefits through differentiation. B) Raise prices above the current reservation price. C) Lower prices to the break-even price. D) Increase the number of stock market shares available to investors.

A.

Which of the following statements is true of accounting data?

Accounting data are historical data and thus backward-looking.

Which of the following statements correctly compares Apple and Microsoft in 2016?

Apple had a higher return on invested capital than Microsoft.

Which of the following is an advantage of applying the economic value creation perspective to assess a firm's performance? A) When the need for "hard numbers" arises, managers and analysts rely on economic value creation perspective to measure competitive advantage. B) In economic value perspective, analysts not only consider historical costs, but also opportunity costs. C) Arriving at the economic value created is easy because determining the value of a good in the eyes of consumers is a simple task. D) It is the most efficient tool for assessing corporate-level competitive advantage of highly diversified companies with large product portfolios.

B.

Serena paid $900 for a camera that she thought was worth $1100 for all the features included in it. For the consumer electronics firm selling the camera, however, the cost of producing the camera was only $350. What is the consumer surplus in this scenario?

Consumer surplus is the difference between the value a consumer attaches to a good or service (V), and what he or she pays for it (P), or (V - P), that is, $1100 - $900 = $200.

________ is a business model in which the manufacturer sets a fixed price on a product, but the retailer is free to set it's own price.

D) Wholesale

78) Aguilar Industries has produced a new piece of technology that will monitor the soil moisture in a user's garden and send a notification to an app on the user's phone when it is time to water their plants. The goal of this inexpensive technology is to entice users to purchase Aguilar's more expensive automated watering system, so that they can trigger the watering process from the app on their phones. Which business model is most likely to help Aguilar Industries accomplish its goals? A) agency B) wholesale C) pay-as-you-go D) freemium

D,

EagleCorp's return on invested capital (ROIC) was 15 percent, and its cost of capital was 12 percent. During the same period, Myna Bird Inc.'s ROIC was 22 percent and its cost of capital was 25 percent. What does this information tell Mark?

EagleCorp is more likely to create value while Myna Bird Inc. is more likely to destroy value (we want ROIC > CoC)

A firm will always see its stock price appreciate when it demonstrates measurable growth.

False - a firm's stock price increases only if firm's rate of growth >> investor's expectations

Competitive advantage goes to the firm that maximizes the difference between the cost of producing a good and the retail price that consumers pay.

False - goes to firm that achieves largest economic value: difference between v -c

Generally speaking, a firm will create value if its return on invested capital (ROIC) is less than the cost of capital.

False - if a firm's ROIC > cost of capital = value generated

A company's total asset base consists of its current assets plus plant, property, and equipment (PPE).

False : includes intangible assests as well

You are the founder of Shadow Skateboards, and you are considering methods of gaining and sustaining a competitive advantage. Which of the following changes has the best chance of quickly creating a sustainable advantage?

Many executives consider business model innovation to be more important than process or product innovation. c. allowing customers to upload their own image designs and help assemble the finished product at retail locations

________ precisely indicates how much of a firm's sales is converted into profits.

Return on revenue

In the why, what, who, and how of business models framework, the why dimension asks "why does the business model create value?"

True

________, which is the return on risk capital, includes stock price appreciation plus dividends received over a specific period. A) Total return to shareholders B) Earnings per share C) Receivables turnover D) Dividend yield

a. Total return...

Unlike the financial ratios based on accounting data, total return to shareholders is ?

an external performance metric.

The translation of strategy into action primarily takes place in a firm's

business model

Once a firm chooses a business model, it must stick with it for the life of the firm.

false

Cost of capital

firm's cost of financing operations from both equity

The ratio of SG&A/Revenue is an indicator of a firm's focus on

marketing and sales to promote products and services

30) Which of the following expressions accurately describes market cap?

number of outstanding shares * share price

________ are best described as the value of the best forgone alternative use of the resources employed.

opportunity costs

The ratio Cost of goods sold/Revenue indicates how efficiently a company can

produce a good

The difference between the price charged for a product and the cost to manufacture it is referred to as the

producer surplus

How does a sustainable strategy typically help a firm?

t helps the firm achieve positive results along the social and ecological dimensions.

Managers must first develop a strategy that is likely to produce a competitive advantage before implementing a balanced scorecard approach.

true

The cost of capital to create a product is a fixed cost because it is

unaffected by consumer demand.

________ denotes the dollar amount a consumer would attach to a good or service.

value

79) A defining characteristic of the subscription-based business model is that the A) user pays for only the services he or she consumes. B) user pays for access to a product or service whether he or she uses it during the payment term or not. C) basic features of a product or service are provided free of charge, but the user must pay for premium services such as advanced features or add-ons. D) initial product is often sold at a loss or given away for free in order to drive demand for complementary goods.

B.

________ is best described as the difference between a buyer's willingness to pay for a product or service and a firm's total cost to produce it.

Economic value created

) Economic value creation is best expressed as

Economic value creation equals consumer surplus plus firm profit, or the sum of consumer and producer surplus.

Mobius Electronics incurs a cost of $350 to produce one unit of a cell phone. The company's management has priced the product at $600 in the market. Considering the technological advancement of the cell phone, customers perceive its value to be around $800. What is the economic value created in this scenario?

Economic value creation equals consumer surplus plus firm profit, or the sum of consumer and producer surplus. In this case, the economic value created is ($800 - $600) + ($600 - $350) = $450.

The working capital turnover of Tesva Systems Corp. is 6.0. What does this financial data suggest?

For every dollar Tesva Systems puts to work, the company realizes $6.00 of sales.

The company's vision is to become the leading supplier of gardening materials west of the Mississippi River. In assessing the firm's current state, Erin has determined that the firm could differentiate itself from competitors with an easy-to-use online ordering system and a two-day delivery guarantee. To accomplish this, Erin has determined that SpringTime must spend the next two quarters honing its capabilities for sourcing materials quickly and improving its web development competencies. According to the balanced scorecard approach, what is wrong with Erin's thinking?

In the balanced scorecard approach, the four questions asked by managers are 1) "How do customers view us?" 2) "How do we create value" 3) "What core competencies do we need?" and 4) "How do shareholders view us?" : She has failed to account for external factors such as customer perceptions and shareholder perceptions.

The three financial ratios that constitute return on revenue are Cost of goods sold/Revenue, Research & development expense/Revenue, and

Selling, general & administrative expense/ revenue

75) Which of the following scenarios best illustrates bundling? A) Clean Brush Inc. sells its electric toothbrushes for a low cost, but charges a high price for replacement brushes. B) Cumulus Media Inc. sells its cloud computing network by having customers pay for the service as they use it. C) Sharp Cable Inc. sells its basic TV channels for free but charges high prices for any channels that customers add on later. D) Fresh Seeds Inc. sells seed packages, in which a person can buy a package of three types of seeds at a discounted price compared to buying the seeds individually.

The bundling business model sells products or services for which demand is negatively correlated at a discount. b)

The Lynx Manufacturing Company produces components used in electronic toys. In fiscal year 2017, Lynx earned an accounting profit of $3 million. However, Lynx's production facilities might have also been used to produce components for mobile phones, which would have generated $2 million in revenues and saved the company $500,000 in production costs. Which of the following statements is true?

Thus, the total opportunity cost was $2.5 million. After subtracting the $2.5 million in opportunity costs from the $3 million accounting profit, Lynx earned an economic profit of $500,000.

How does a firm capture its producer surplus for a good or service?

as profit per unit sold

Polygon sells its e-book readers at the cost price of $15 each. However, the company makes its profits when users have to download or buy books online. Which of the following business models is Polygon implementing? A) subscription-based B) razor-razor-blade C) pay-as-you-go D) direct sales

b)

The new model will be created by selling the old showrooms and shifting resources to the new online site and regional offices for sales personnel. What question remains for Rock Bottom to ask in order to put its strategy into action? A) Why does the business model create value? B) What activities need to be performed to create and deliver the offerings to consumers? C) How are the offerings to the customers created? D) Who are the main stakeholders who will be performing the activities?

b.

A manager's responsibility is to monitor and assess the performance of his or her firm

false

A sustainable strategy is one that produces a competitive advantage that can be maintained over time.

false - strategy that is pursued over time without detrimental effects on people or planet

After trying on a dress, a consumer assesses it to be worth a maximum of $100 and is willing to pay that amount for the dress. However, the dress was priced at $80. What is the amount, $100, referred to as?

he value (V) the consumer attaches to the dress