Three Standard Performance Dimensions - Answer-1. What is the firm's ACCOUNTING PROFITABILITY?
2. How much SHAREHOLDER VALUE does the firm create?
3.How much ECONOMIC VALUE does the firm generate?
Since competitive advantage is defined as superior performance RELATIVE to other competitors ...
WPC 480 Quiz 2 Exam Questions with
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Three Standard Performance Dimensions - Answer-1. What is the firm's ACCOUNTING
PROFITABILITY?
2. How much SHAREHOLDER VALUE does the firm create?
3.How much ECONOMIC VALUE does the firm generate?
Since competitive advantage is defined as superior performance RELATIVE to other
competitors in the same industry or the industry average, a firm's managers must be
able to accomplish two critical tasks: - Answer-1. Accurately assess the performance of
their firm.
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= - Answer-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: - Answer-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) - Answer-If a firm's ROIC is
greater than its cost of capital, it generate value:
If it is less than the cost of capital, the firm destroys value
Return on Revenue (ROR)= - Answer-(Net profits/revenue)
Working Capital Turnover= - Answer-(Revenue/ Working Capital)
Return on Revenue (ROR) three financial rations: - Answer--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 - Answer-A measure
of how effectively capital is being used to generate revenue
Higher ratios of RECEIVABLES TURNOVER (revenue/ accounts receivable) imply: -
Answer-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: - Answer-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 - Answer--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.. - Answer-future expectations fro a firm's growth potential
and performance.
Shareholders- - Answer-individuals or organizations that own one or more shares of
stock in a public company- are the legal owners of public companies.
Risk Capital- - Answer-Most important part to shareholders, is the money they provide
in return for an equity share, money that they cannot recover if the firm gots bankrupt.
Total return on shareholders- - Answer-This is what investors are primarily interested in.
It is the return on risk capital, including stock price appreciation plus dividends received
over a specific period.
* EXTERNAL and FORWARD_LOOKING performance metric
-indicates how the stock market views all available public information about a firm's
past, current state, and expected future performance, with most of the weight on future
growth expectations
Efficient-market hypothesis- - Answer-The idea that all that all available information
about a firm's past, current state, and expected further performance is embedded in the
market price of the firm's stock
Market Capitalization- - Answer-Captures the total dollar market value of a company's
total outstanding shares at any given point in time
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