WPC 480 Quiz 2 Questions With Complete
Solutions
2. Compare and benchmark their firm's performance to other competitors in the same industry or
against the industry average.
(ROIC) Return on investment capital= ROIC=(Net profits/ Invested capital)
*Popular metric because it is a good proxy f...
2. Compare and benchmark their firm's performance to other competitors in the same industry or
against the industry average.
(ROIC) Return on investment capital= ROIC=(Net profits/ Invested capital)
*Popular metric because it is a good proxy for FIRM PROFITABILITY
*The ratios measures how effectively a company uses it TOTAL INVESTED CAPITAL
Total Invest Capital, consists of two components: 1. SHAREHOLDERS' EQUITY
through the selling of share to the public
2. INTEREST-BEARING DEBT through borrowing from financial institutional bondholders
Rule of thumb for ROIC (Return on investment capital) If a firm's ROIC is greater than its
cost of capital, it generate value:
, WPC 480 Quiz 2 Questions With Complete
Solutions
If it is less than the cost of capital, the firm destroys value
Return on Revenue (ROR)= (Net profits/revenue)
Working Capital Turnover= (Revenue/ Working Capital)
Return on Revenue (ROR) three financial rations: -Cost of goods sold (COGS) / Revenue.
*Indicates how efficiently a company product a good
- Research & development (R&D) expense / Revenue.
*Indicates how much of each dollar that the firm earns in sales in invested in sales, general, and
administrative expenses
- Selling, general, & administrative (SG&A) expense / Revenue.
Second Component of ROIC: WORKING CAPITAL TURNOVER A measure of how
effectively capital is being used to generate revenue
, WPC 480 Quiz 2 Questions With Complete
Solutions
Higher ratios of RECEIVABLES TURNOVER (revenue/ accounts receivable) imply:
More efficient management in collecting receivable and short durations of interest-free
loans to customers (i.e. time until payments are due)
Payables turnover (revenue/accounts payable) Indicates: How fast the firm is paying its
creditors and how much it benefits from interest-free loan extended by its suppliers
Limitations of Accounting Data -All accounting data are historical and thus backward-
looking
-Accounting data do not consider off-balance sheet items
-Accounting data four mainly on tangible assets, which ar Eno longer the most important
Market Valuation is based on.. future expectations fro a firm's growth potential and
performance.
Shareholders- individuals or organizations that own one or more shares of stock in a
public company- are the legal owners of public companies.
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