Business policy Exam 2 chapter 5

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

an external performance metric.

Andrew invested $200,000 in the shares of a company. At the end of a year, he had earned $7,000 as dividends on his shares along with a $1,000 appreciation in the overall value of his shares. However, if Andrew had invested the same amount on an asset, like gold, the appreciation in its value would have earned him $10,000 at the end of the year. In this scenario, which of the following is Andrew's opportunity cost?

$10,000

A firm has 30 million shares outstanding, and each share is traded at $100. Also, each shareholder gets a dividend of $2000 annually. In this case, the market capitalization is

$3 billion, that is, 30 million shares × $100

Which of the following scenarios best illustrates crowdsourcing

A company encourages the general community to post new product ideas on its official website.

The payable turnover for Apple and BlackBerry (as of fiscal year 2012) was 7.4 and 24.8 respectively. From this data we can conclude that

Apple has been more efficient than Blackberry in paying creditors and generating interest-free loans from suppliers

At present, _____ make up the oldest cohort of the workforce

Baby Boomers

Which of the following statements about competitive advantage is true?

Competitive advantage can be assessed by measuring accounting profit, shareholder value, or economic value.

Which of the following statements is NOT true of competitive advantage?

Competitive advantage is an absolute measure

Which of the following ratios best expresses inventory turnover?

Cost of goods sold/Inventory

_____ 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

_____ most precisely measures how well a company leverages its fixed assets, particularly property, plant, and equipment (PPE).

Fixed asset turnover

When using the balanced scorecard approach to assess a firm's performance, which of the following is NOT a key question that managers need to answer?

How do we reduce the economic value created?

Which of the following is an advantage of applying the economic value creation perspective to assess a firm's performance?

In economic value perspective, analysts not only consider historical costs, but also opportunity costs.

How does a sustainable strategy typically help a firm?

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

Which of the following expressions accurately describes market cap?

It is the product of the number of outstanding shares and the share price.

Which of the following equations best expresses return on revenue?

Net profits/Revenue

When GD Inc. declared a dividend of $20,000,000, its market value increased from $8 billion to $8.5 billion. However, it lost a chance to reinvest $20,000,000 in the research and development of a new product which would have earned a profit of $200 million. Thus, this $200 million is referred to as GD Inc.'s _____.

Opportunity Cost

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

Opportunity costs

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

Return on revenue

Which of the following best expresses fixed asset turnover?

Revenue/Fixed assets

Which of the following is NOT true of risk capital?

Risk capital invested in a firm can be legally recovered if the firm goes bankrupt

_____ are the legal owners of public companies.

Shareholders

Which of the following business models has been traditionally used by the magazine and newspaper industry?

Subscription-based

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.

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

The balanced scorecard model

Which of the following is NOT an accurate expression of the economic value created per unit of a product sold?

The difference between the price charged and the firm's cost

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?

The firm's number of outstanding shares is 25 million

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

The triple-bottom-line approach

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

Value

_____ 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

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

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

business model

In an economic context, strategy for producers is primarily about:

capturing the economic value created as much as possible

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

consumer's maximum willingness to pay for it.

Economic value creation is best expressed as _____.

consumer surplus plus firm profit

Janet is a 23-year-old employee at DR Products Inc. As a millennial, she will tend to:

expect her company to be socially responsible

In order to achieve a competitive advantage, a firm should be able to:

increase the difference between the value created and the cost to produce it.

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

producer surplus or (Profit)

In the _____ business model, the initial product is often sold at a loss or given away for free in order to drive demand for complementary goods.

razor-razor-blade

From an investors' or shareholders' perspective, the measure of competitive advantage that matters most is the _____.

return on risk capital

Return on risk capital primarily includes

stock price appreciation plus dividends received over a specific period

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

strong focus on innovation to improve current products and services.

The top management at BioTrue Pharma Inc. through rigorous testing ensures that the company develops and sells drugs that are free of harmful side-effects. Also, the company ensures that the chemical waste generated in the manufacturing process is kept to a bare minimum and is disposed of according to the regulations of the Environmental Protection Agency. The management assesses its overall performance based on these dimensions. Thus, the managers at Bio True Pharma are applying the _____ approach to measure firm performance.

triple bottom line

Both Vibrant Phones Inc. and Oryxo Inc. incur a cost of $200 to manufacture a single unit of a cell phone. However, Vibrant Phones creates more economic value than what Oryxo does. What does this imply?

Vibrant Phones sells its products at a better price than Oryxo

By selling a laptop at $1000 for which consumers are willing to pay up to $1200, a consumer electronics firm makes a profit of $400 per unit. In this scenario, the amount $600, that is ($1200 - $1000) + $400, is the _____.

economic value created

A watch-making company has priced one of its wrist watches 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 wrist watch?

$170

A firm incurs $100 to manufacture an office table. It fixes the market price of the table as $250, and discounts the price to $200. However, the maximum a person is willing to pay for it is $180. What is the amount of total perceived consumer benefits in this scenario?

$180

Gina 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?

$200, 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.

Osion Electronics Inc. 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?

$450,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 of a small home-based business is $200,000. The revenues generated account to $600,000, and the profits incurred are $300,000. What would be the company's working capital turnover?

3, that is, $600,000/$200,000

Which of the following businesses is required by law to make its data available to the public?

A software company with over 300 shareholders

Blue Horizon Inc. is an Internet service provider. It provides a router free of charge when users sign up for a two-year wireless service plan. In this plan, users pay in advance irrespective of whether they use the Internet package during the two-year period or not. Which of the following business models does this scenario best illustrate?

A. A combination of the razor-razor-blade model and the subscription-based business model

Red Ink Electronics Inc. faced a serious technical problem when developing a microprocessor for a high-tech medical device. The employees of the company including those in the research and development department were unable to solve the issue. Thus, an open call was made to the general public, mainly technicians and product engineers, on the company's website to volunteer to solve the technical problem the company faced. Which of the following does the scenario best illustrate

A. Crowdsourcing

Which of the following statements is true of accounting data?

Accounting data are historical data and thus backward-looking.

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

As profit per unit sold

The receivables turnover of GD Products Inc. is 13.6 and that of its competitor, AP Goods Inc., is 6.0. What does this financial data primarily imply?

GD Products collects accounts receivables faster than what AP Goods does.

_____ is best described as a process in which a group of people voluntarily performs tasks that were traditionally completed by a firm's employees

Crowdsourcing

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

Customer experience

Photohome is a file hosting service that allows users to store up to 5GB of data with no restrictions or charges. However, users have to pay a fee for advanced features on the cloud storage system and additional storage space. Which of the following business models does this best illustrate?

Freemium

The fixed asset turnover of a company is 8.3. What do you infer from this?

Every dollar spent on the company's fixed assets generates $8.30 of revenue.

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.

Which of the following is an advantage of the balanced scorecard?

It allows managers to translate a firm's vision into measurable operational goals.

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

It attempts to provide a holistic perspective on firm performance.

Which of the following is NOT an advantage of the balanced scorecard approach to assess firm performance?

It is a tool which can be effectively used by managers for both strategic implementation and strategic formulation.

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.

Maverick Communications Inc. is a cellular service provider that charges its customers $1 for three hours of talk time. So, if a customer's talk time for a month is 60 hours, the company charges him or her $20 at the end of the month. Which of the following business models does this best illustrate?

Pay-as-you-go

_____ indicates how much a firm benefits from interest-free loans extended by its suppliers and creditors

Payables turnover

True Vibgyor Inc. 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 True Vibgyor implementing?

Razor-razor-blade

_____ indicates how fast a firm is collecting the credit amount extended by a firm to its customers

Receivables turnover

Which of the following is NOT a limitation of the economic value creation framework?

The framework fails to provide the foundation that will help firms decide between cost-leadership or differentiation strategies.

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?

The value (V) the consumer attaches to the dress

Which of the following statements is true of the triple bottom line?

Three dimensions, economic, social, and ecological, make up the triple bottom line.

Which of the following is an external performance metric?

Total return to shareholders

_____, which is the return on risk capital, includes stock price appreciation plus dividends received over a specific period

Total return to shareholders

True Machine Inc. and One Electrona Inc. are two competing consumer electronics companies. While True Machine's COGS/Revenue is 66%, One Electrona's is 74%. What do you infer from this financial data?

True Machine's profit margin is higher than that of One Electrona.

Threadless is a community-centered online apparel store that leverages user-generated content. The idea is to turn consumers into prosumers, a hybrid between producers and consumers. Members of the Threadless community do most of the work, which they consider fun: They submit T-shirt designs online, and community members vote on which designs they like best. The designs receiving the most votes are put in production, printed, and sold online. It can be said that Threadless uses the _____ technique.

crowdsourcing

In the fiscal year 2012, BlackBerry's Cost of goods sold (COGS)/Revenue ratio was higher than that of its competitor, Apple. This implies that BlackBerry needs to work toward

driving down its costs

Competitive advantage goes to the firm that achieves the

largest economic value created.

Samantha is a recent fashion graduate. She started her own apparel store with an investment of $300,000. In the first year she made a profit of $60,000. If she had taken up a job as a fashion editor for a magazine, she would have earned $50,000 as salary per year. Also, she could have invested her capital, $300,000, in treasury bonds and earned an interest of $12,000. Thus, the amount $62,000 ($50,000 + $12,000) would be Samantha's _____.

opportunity cost

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

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

Using the _____ approach, managers audit their company's fulfillment of its social and ecological obligations to stakeholders such as employees, customers, suppliers, and communities as conscientiously as they track its financial performance.

triple-bottom-line

A defining characteristic of the subscription-based business model is that the:

user pays for access to a product or service whether he or she uses it during the payment term or not.

Blue Ego Inc. is a market leader in the cell phone industry. To gain competitive advantage, the company has a post on its official site requesting its suppliers and customers to contribute ideas about the kinds of features and technology they think should be included in the next smartphone. This has helped the company reduce the burden of innovation on its employees, effectively meet customers' needs, and also include the larger community in product development. This process best exemplifies

crowdsourcing.

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

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

unaffected by consumer demand.

In the freemium business model, the

users are not charged for the basic features of a product or service, but the user must pay for premium advanced features or add-ons.

A defining characteristic of the pay-as-you-go business model is that the

users pay for only the services they consume.