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WPC 480 Quiz 2 with complete solutions
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WPC 480 Quiz 2 with complete solutions
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WPC 480 Quiz 2 with complete solutionsThree iiStandard iiPerformance iiDimensions ii- iiAnswers ii-1. iiWhat iiis iithe iifirm's
iiACCOUNTING iiPROFITABILITY?
2. iiHow iimuch iiSHAREHOLDER iiVALUE iidoes iithe iifirm iicreate?
3.How iimuch iiECONOMIC iiVALUE iidoes iithe iifirm iigenerate?
Since iicompetitive iiadvantage iiis iidefined iias iisuperior iiperformance iiRELATIVE iito
iiother iicompetitors iiin iithe iisame iiindustry iior iithe iiindustry iiaverage, iia iifirm's iimanagers
iimust iibe iiable iito iiaccomplish iitwo iicritical iitasks: ii- iiAnswers ii-1. iiAccurately iiassess
iithe iiperformance iiof iitheir iifirm.
2. iiCompare iiand iibenchmark iitheir iifirm's iiperformance iito iiother iicompetitors iiin iithe
iisame iiindustry iior iiagainst iithe iiindustry iiaverage.
(ROIC) iiReturn iion iiinvestment iicapital= ii- iiAnswers ii-ROIC=(Net iiprofits/ iiInvested
iicapital)
*Popular iimetric iibecause iiit iiis iia iigood iiproxy iifor iiFIRM iiPROFITABILITY
*The iiratios iimeasures iihow iieffectively iia iicompany iiuses iiit iiTOTAL iiINVESTED
iiCAPITAL
Total iiInvest iiCapital, iiconsists iiof iitwo iicomponents: ii- iiAnswers ii-1. iiSHAREHOLDERS'
iiEQUITY iithrough iithe iiselling iiof iishare iito iithe iipublic
2. iiINTEREST-BEARING iiDEBT iithrough iiborrowing iifrom iifinancial iiinstitutional
iibondholders
Rule iiof iithumb iifor iiROIC ii(Return iion iiinvestment iicapital) ii- iiAnswers ii-If iia iifirm's
iiROIC iiis iigreater iithan iiits iicost iiof iicapital, iiit iigenerate iivalue:
If iiit iiis iiless iithan iithe iicost iiof iicapital, iithe iifirm iidestroys iivalue
Return iion iiRevenue ii(ROR)= ii- iiAnswers ii-(Net iiprofits/revenue)
Working iiCapital iiTurnover= ii- iiAnswers ii-(Revenue/ iiWorking iiCapital)
Return iion iiRevenue ii(ROR) iithree iifinancial iirations: ii- iiAnswers ii--Cost iiof iigoods iisold
ii(COGS) ii/ iiRevenue.
, *Indicates iihow iiefficiently iia iicompany iiproduct iia iigood
- iiResearch ii& iidevelopment ii(R&D) iiexpense ii/ iiRevenue.
*Indicates iihow iimuch iiof iieach iidollar iithat iithe iifirm iiearns iiin iisales iiin iiinvested iiin
iisales, iigeneral, iiand iiadministrative iiexpenses
- iiSelling, iigeneral, ii& iiadministrative ii(SG&A) iiexpense ii/ iiRevenue.
Second iiComponent iiof iiROIC: iiWORKING iiCAPITAL iiTURNOVER ii- iiAnswers ii-A
iimeasure iiof iihow iieffectively iicapital iiis iibeing iiused iito iigenerate iirevenue
Higher iiratios iiof iiRECEIVABLES iiTURNOVER ii(revenue/ iiaccounts iireceivable) iiimply:
ii- iiAnswers ii-More iiefficient iimanagement iiin iicollecting iireceivable iiand iishort iidurations
iiof iiinterest-free iiloans iito iicustomers ii(i.e. iitime iiuntil iipayments iiare iidue)
Payables iiturnover ii(revenue/accounts iipayable) iiIndicates: ii- iiAnswers ii-How iifast iithe
iifirm iiis iipaying iiits iicreditors iiand iihow iimuch iiit iibenefits iifrom iiinterest-free iiloan
iiextended iiby iiits iisuppliers
Limitations iiof iiAccounting iiData ii- iiAnswers ii--All iiaccounting iidata iiare iihistorical iiand
iithus iibackward-looking
-Accounting iidata iido iinot iiconsider iioff-balance iisheet iiitems
-Accounting iidata iifour iimainly iion iitangible iiassets, iiwhich iiar iiEno iilonger iithe iimost
iiimportant
Market iiValuation iiis iibased iion.. ii- iiAnswers ii-future iiexpectations iifro iia iifirm's iigrowth
iipotential iiand iiperformance.
Shareholders- ii- iiAnswers ii-individuals iior iiorganizations iithat iiown iione iior iimore iishares
iiof iistock iiin iia iipublic iicompany- iiare iithe iilegal iiowners iiof iipublic iicompanies.
Risk iiCapital- ii- iiAnswers ii-Most iiimportant iipart iito iishareholders, iiis iithe iimoney iithey
iiprovide iiin iireturn iifor iian iiequity iishare, iimoney iithat iithey iicannot iirecover iiif iithe iifirm
iigots iibankrupt.
Total iireturn iion iishareholders- ii- iiAnswers ii-This iiis iiwhat iiinvestors iiare iiprimarily
iiinterested iiin. iiIt iiis iithe iireturn iion iirisk iicapital, iiincluding iistock iiprice iiappreciation iiplus
iidividends iireceived iiover iia iispecific iiperiod. ii
* iiEXTERNAL iiand iiFORWARD_LOOKING iiperformance iimetric
-indicates iihow iithe iistock iimarket iiviews iiall iiavailable iipublic iiinformation iiabout iia
iifirm's iipast, iicurrent iistate, iiand iiexpected iifuture iiperformance, iiwith iimost iiof iithe
iiweight iion iifuture iigrowth iiexpectations
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