Chap 5

Value is determined by the perceived benefits a good or service provides to a(n)

B. buyer.

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

A. Payables turnover

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

A. produce a good.

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

A. return on risk capital.

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?

B. $10,000

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?

B. $450

If a firm's market capitalization is $1 billion and the share price is $50, how many shares outstanding does the firm have?

B. 20 million

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

B. Fixed asset turnover

Which of the following questions challenges managers to come up with strategic objectives that ensure future competitiveness?

B. How do we create value?

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?

B. How do we reduce the economic value created?

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

B. Receivables turnover

Which of the following best expresses fixed asset turnover?

B. Revenue/Fixed assets

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

C. Return on revenue

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

C. 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.

The balanced-scorecard can accommodate

C. both short- and long-term performance metrics.

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

C. business model.

Economic value creation is best expressed as

C. consumer surplus plus firm profit.

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

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

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

C. opportunity cost.

The top management at Parallela 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 Parallela Pharma are applying the _____ approach to measure firm performance.

C. triple-bottom-line

Free Spirit 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?

C. pay-as-you-go

Airbnb rents spaces that previously would have been unused to generate revenue, while also dramatically increasing the potential amount of accommodation space in the 191 countries. This business uses a _____ technique.

C. peer-to-peer

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

C. producer surplus.

Best Fit Club, a chain of gyms and spas, requires its customers to pay a quarterly or an annual fee to use its services. Irrespective of whether they frequently use the services during the payment period or not, members have to pay in advance. Which of the following business models does this best illustrate?

C. subscription-based

Which of the following is an external performance metric?

D. total return to shareholders

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?

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

In 2014, Apple turned over its inventory more than 53 times. In stark contrast, Microsoft turned over its inventory only about 10 times during the year. Which of the following best explains this difference?

A. Apple had a more effective management of its global supply chain than Microsoft.

_____ 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.

A. Economic value created

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

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

Which of the following expressions accurately describes market cap?

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

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

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

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

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

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.

How is the triple-bottom-line approach different from the traditional approaches to measuring competitive advantage?

A. The triple-bottom-line takes a more integrative and holistic view in assessing a company's performance than traditional approaches do.

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

A. Total return to shareholders

GlobalCom 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

Return on risk capital primarily includes

A. stock price appreciation plus dividends received over a specific period.

Best Cut Inc. sells cutlery by having salespeople set up appointments with potential customers and give them a sales pitch for the product. When a salesperson sells cutlery, he or she gets a predetermined percentage commission. This type of business model is called

A. an agency.

Which of the following is the most accurate characterization of stakeholder theory?

A. an approach to understanding a firm as embedded in a network of internal and external constituencies that each make contributions and expect consideration in return

Jenny liked a pair of sapphire earrings and thought they would cost around $1,000. She was surprised to find that the price of the earrings was $1,500. However, she decided to buy the earrings anyway. This scenario describes

A. consumer surplus.

Pilot Games Inc. allows users to play the trial versions of its games without any charge. However, users have to purchase the games to access the upgraded version of the games with advanced features. Which of the following business models is Pilot Games using in this scenario?

A. freemium

Competitive advantage goes to the firm that achieves the

A. largest economic value created.

Manufacturers of electric fragrance diffusers sell the electric outer device at an extremely low price, sometimes even at a loss. However, they make their money on the product by charging a premium on the perfume refills that have to be replaced regularly. Which of the following business models does this best illustrate?

A. razor-razor-blade

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

A. strong focus on innovation to improve current products and services.

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

A. subscription-based

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?

A. the triple-bottom-line approach

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.

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.

A. triple-bottom-line

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

A. users pay for only the services they consume.

In 2014, Apple had a return on revenue of 29.3 percent, and Microsoft had a return on revenue of 32 percent. Even so, Apple had a higher return on invested capital than Microsoft. Why did this happen?

B. Apple was able to charge a much higher margin for its products and services than Microsoft.

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

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

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

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

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

B. Opportunity costs

Which of the following is not true of risk capital?

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

_____ are the legal owners of public companies.

B. Shareholders

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

B. Value

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

B. an external performance metric.

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

B. as profit per unit sold

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

B. consumer's maximum willingness to pay for it.

Triple-bottom-line is a combination of economic, social, and _____ concerns that can lead to a sustainable strategy.

B. ecological

By selling a laptop at $1,000 for which consumers are willing to pay up to $1,200, a consumer electronics firm makes a profit of $400 per unit. In this scenario, the amount $600, that is ($1200 - $1000) + $400, is the

B. economic value created.

Janet is the CEO of Far Sight Inc., which uses a triple-bottom-line approach. As a result, Janet will tend to

B. expect her company to be socially responsible.

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?

C. $170

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?

B. freemium

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

B. marketing to promote its products and services.

TravelCheap Inc. is a car rental business that charges customers based on how many miles they put on a car on a daily basis. As result, a person who uses a car to travel from Chicago to Denver during a week is charged much more than a person who uses a car only to travel one mile to the grocery store six times a week. TravelCheap uses a business model called

B. pay-as-you-go.

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.

B. razor-razor-blade

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?

B. razor-razor-blade

Mia has purchased an Internet package for three months, in which she can use 30 mbps Internet speed. However, for the service, she needs to pay a fee of $50 in advance irrespective of whether she uses the Internet during the service period or not. This arrangement best illustrates the _____ strategy.

B. subscription-based

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

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

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?

C. $180

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

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

Apple Watch retailed for $349 in 2015, and the firm was predicted to sell millions of units. The firm's total cost in terms of materials and labor for the Apple Watch was no more than $84. Thus, Apple's profit for each watch sold is an estimated $265, with a profit margin of _____ percent.

C. 315

Which of the following describes a peer-to-peer technique?

C. A company matches an individual with a cleaning service.

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

C. Competitive advantage is an absolute measure.

_____ of receivables turnover imply more efficient management in collecting accounts receivable and shorter durations of interest-free loans to customers.

C. Higher ratios

_____ is the money shareholders provide in return for an equity share, which they cannot recover if the firm goes bankrupt.

C. Risk capital

Smart Feet Inc. produces shoes that are better quality and cost more to make than the shoes of its competitors. Smart Feet realizes that there will be a large difference between the cost to produce the shoes and the consumer's willingness to pay for them. Even so, Smart Feet decides to charge the same price as its competitors. Which of the following will most likely be the result of this action?

C. Smart Feet will gain market share.

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

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

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

C. VK Products collects accounts receivables faster than AP Goods does.

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 Oryxo does. What does this imply?

C. Vibrant Phones sells its products at a better price than Oryxo.

Which of the following statements about competitive advantage is true?

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

In an economic context, strategy for producers is primarily about

C. capturing the economic value created as much as possible.

Taking advantage of the pricing flexibility inherent in the wholesale model, Amazon offered many books (especially e-books) below the cost that other retailers had to pay to publishers. By doing this, Amazon showed how business models can be affected through

C. disruption.

The management team for SafeCare Chemicals Inc. came up with the following vision statement: "SafeCare Chemicals will conscientiously track its financial performance to ensure profits for its investors, enhance its community through employment and supporting charities, and dispose of waste in a manner that will not harm the environment." This vision statement is most likely based on the

C. triple-bottom-line approach.

In the freemium business model, the

C. 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.

Hugo Books Inc. is a retailer that buys books at a fixed price from publishers. Recently, Hugo offered a deal in which customers could buy a package of three mystery books at a discounted rate. Which of the following business models has Hugo Books combined?

C. wholesale and bundling

Which of the following is not a factor that makes total return to shareholders and market capitalization unreliable measures of company performance?

D. the unpredictability of return on revenue

Nicki 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?

D. $200

Which of the following ratios best expresses inventory turnover?

D. Cost of goods sold/Inventory

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

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

Which of the following scenarios best illustrates bundling?

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.

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

D. It attempts to provide a holistic perspective on firm performance.

How does a sustainable strategy typically help a firm?

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

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

D. 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 the balanced-scorecard approach?

D. It provides limited guidance about which metrics to choose.

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

D. Selling, general, & administrative expense/Revenue.

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

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

_____ is a business model in which the manufacturer sets a fixed price on a product, but the retailer is to free set its own price.

D. Wholesale

The translation of strategy into action takes place in the firm's _____, which details the firm's competitive tactics and initiatives.

D. business model

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

D. customer experience

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

D. economic value created.

Kerry the Kangaroo Inc. specializes in producing and selling a stuffed kangaroo named Kerry. Although the stuffed kangaroo has sold well, the clothes that can be bought to dress the kangaroo have not sold as well as expected. As a result, Kerry the Kangaroo has warehouses full of hats, pants, sweaters, and shoes to dress Kerry. This firm used a _____ to determine how much of its capital is tied up in these accessory items.

D. inventory turnover

Genevieve 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 Genevieve's

D. opportunity cost.

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

D. the balanced-scorecard model

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

D. the difference between the price charged and the firm's cost

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?

D. the value (V) the consumer attaches to the dress

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

D. unaffected by consumer demand.

Which of the following statements is true of accounting data?

B. Accounting data are historical data and thus backward-looking.