Question 1

In the why, what, who, and how of business models framework, the why dimension asks "why does the business model create value?"

Accepted Answer

The why dimension considers the reasons why a proposed business model would create value for both customers and stockholders.

Question 2

________ is best described as a measure of how effectively capital is being used by a firm to generate revenue.
A) Return on revenue
B) Risk capital
C) Working capital turnover
D) Revenue per employee

Accepted Answer

A component of return on invested capital is working capital turnover, which is a measure of how effectively capital is being used by a firm to generate revenue.

Question 3

Which of the following statements correctly compares Apple and Microsoft in 2016?
A) Apple had a higher return on revenue than Microsoft.
B) Apple had a higher return on invested capital than Microsoft.
C) Microsoft had higher total sales than Apple.
D) Microsoft had a lower cost structure than Apple.

Accepted Answer

Apple's ROIC was 18.3 percent in 2016, while Microsoft's was 13.7 percent.

Question 4

Once a firm chooses a business model, it must stick with it for the life of the firm.

Accepted Answer

Business models evolve dynamically, and we can see many combinations and permutations. Sometimes business models are tweaked to respond to disruptions in the market, efforts that can conflict with fair trade practices and may even prompt government intervention.

Question 5

The three financial ratios that constitute return on revenue are Cost of goods sold/Revenue, Research & development expense/Revenue, and
A) Accounting profitability/Revenue.
B) Economic value created/Revenue.
C) Total return to shareholders/Revenue.
D) Selling, general, & administrative expense/Revenue.

Accepted Answer

The three financial ratios that constitute return on revenue are Cost of goods sold/Revenue, Research & Development (R&D) expense/Revenue, and Selling, general, & administrative (SG&A) expense/Revenue.

Question 6

A high percentage of R&D/Revenue ratio indicates a(n)
A) strong focus on innovation to improve current products and services.
B) inefficiency in the management to focus on new products.
C) strong focus on marketing and sales to promote products and services.
D) negligent investment toward research and development.

Accepted Answer

The R&D/Revenue ratio indicates how much of each dollar that a firm earns in sales is invested to conduct research and development. A higher percentage is generally an indicator of a stronger focus on innovation to improve current products and services, and to come up with new ones.

Question 7

A firm will always see its stock price appreciate when it demonstrates measurable growth.

Accepted Answer

A firm's stock price generally increases only if the firm's rate of growth exceeds investors' expectations. This is because investors discount into the present value of the firm's stock price whatever growth rate they foresee in the future. If a low-growth business like Comcast (in cable TV) is expected to grow 2 percent each year but realizes 4 percent growth, its stock price will appreciate. In contrast, if a fast-growing business like Apple in mobile computing is expected to grow by 10 percent annually but delivers "only" 8 percent growth, its stock price will fall.

Question 8

A sustainable strategy is one that produces a competitive advantage that can be maintained over time.

Accepted Answer

A sustainable strategy is a strategy along the social, economic, and ecological dimensions that can be pursued over time without detrimental effects on people or the planet.

Question 9

Generally speaking, a firm will create value if its return on invested capital (ROIC) is less than the cost of capital.

Accepted Answer

As a rule of thumb, if a firm's ROIC is greater than its cost of capital, it generates value; if it is less than the cost of capital, the firm destroys value. The cost of capital represents a firm's cost of financing operations from both equity through issuing stock and debt through issuing bonds.

Question 10

Competitive advantage goes to the firm that maximizes the difference between the cost of producing a good and the retail price that consumers pay.

Accepted Answer

Competitive advantage goes to the firm that achieves the largest economic value created, which is the difference between V, the maximum amount a customer is willing to pay (rather than the price they end up paying in the store), and C, the cost to produce the good or service. The reason is that a large difference between V and C gives the firm two distinct pricing options: (1) It can charge higher prices to reflect the higher value and thus increase its profitability, or (2) it can charge the same price as competitors and thus gain market share. Given this, the strategic objective is to maximize V - C, or the economic value created.

Question 11

A company's total asset base consists of its current assets plus plant, property, and equipment (PPE).

Accepted Answer

A company's total asset base includes current assets, PPE, and intangible assets such as intellectual property, goodwill, and brand value. Intangible assets that are not captured in accounting data have become much more important in firms' stock market valuations over the last few decades.

Question 12

The ratio Cost of goods sold/Revenue indicates how efficiently a company can
A) produce a good.
B) sell a good.
C) advertise a good.
D) design a good.

Accepted Answer

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

Question 13

Managers must first develop a strategy that is likely to produce a competitive advantage before implementing a balanced scorecard approach.

Accepted Answer

The balanced scorecard is a tool for strategy implementation, not for strategy formulation. It is up to a firm's managers to formulate a strategy that will enhance the chances of gaining and sustaining a competitive advantage. When implementing a balanced scorecard, managers need to be aware that a failure to achieve competitive advantage is not so much a reflection of a poor framework but of a strategic failure. The balanced scorecard is only as good as the skills of the managers who use it: they first must devise a strategy that enhances the odds of achieving competitive advantage.

Question 14

A manager's only responsibility is to monitor and assess the performance of his or her firm.

Accepted Answer

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 accurately assess the performance of their firm and compare and benchmark their firm's performance to other competitors in the same industry or against the industry average.

Question 15

________ precisely indicates how much of a firm's sales is converted into profits.
A) Break-even price
B) Working capital turnover
C) Return on revenue
D) Inventory turnover

Accepted Answer

Return on revenue (ROR) indicates how much of a firm's sales is converted into profits.

Question 16

It is April 2018 and Mark is a novice investor who wants to decide between purchasing shares in EagleCorp or Myna Bird Inc. In fiscal year 2017, EagleCorp's return on invested capital (ROIC) was 15 percent, and its cost of capital was 12 percent. During the same period, Myna Bird Inc.'s ROIC was 22 percent and its cost of capital was 25 percent. What does this information tell Mark?
A) Myna Bird Inc. is more likely to create value while EagleCorp is more likely to destroy value.
B) EagleCorp is more likely to create value while Myna Bird Inc. is more likely to destroy value.
C) Both Myna Bird Inc. and EagleCorp are likely to create value.
D) Neither Myna Bird Inc. nor EagleCorp are likely to create value.

Accepted Answer

As a rule of thumb, if a firm's ROIC is greater than its cost of capital, it generates value; if it is less than the cost of capital, the firm destroys value. Since EagleCorp's ROIC was greater than its cost of capital, the company is more likely to create value. Myna Bird Inc., on the other hand, had a cost of capital that exceeded its ROIC, and was thus more likely to destroy value. Mark would be wise to invest his money in EagleCorp.

Question 17

The ratio of SG&A/Revenue is an indicator of a firm's focus on
A) researching to produce innovative products and services.
B) marketing and sales to promote its products and services.
C) producing a good in an efficient manner.
D) creating a good that is cost-effective.

Accepted Answer

SG&A/Revenue is an indicator of the firm's focus on marketing and sales to promote its products and services.

Question 18

Which of the following statements is true of accounting data?
A) Accounting data focus mainly on intangible assets, rather than tangible assets.
B) Accounting data are historical data and thus backward-looking.
C) Accounting data do not have to be adjusted in any manner to compare companies with different capital structures.
D) Accounting data consider off-balance sheet items, such as pension obligations of a firm.

Accepted Answer

All accounting data are historical data and thus backward-looking. Accounting profitability ratios show us only the outcomes from past decisions, and the past is no guarantee of future performance.

Question 19

The efficient market hypothesis suggests that the market price of a firm's stock is an objective indicator of a firm's past, current, and expected future performance.

Accepted Answer

The idea that all available information about a firm's past, current state, and expected future performance is embedded in the market price of the firm's stock is called the efficient-market hypothesis. From this perspective, a firm's share price provides an objective performance indicator.

Question 20

The working capital turnover of Tesva Systems Corp. is 6.0. What does this financial data suggest?
A) For every $6.00 Tesva Systems puts to work, the company incurs a cost of $1.00.
B) For every $6.00 Tesva Systems puts to work, the company realizes sales of $1.00.
C) For every dollar Tesva Systems puts to work, the company realizes $6.00 in loss.
D) For every dollar Tesva Systems puts to work, the company realizes $6.00 of sales.

Accepted Answer

From the given data, it can be concluded that for every dollar Tesva Systems puts to work, the company realizes $6.00 of sales. A component of return on invested capital is working capital turnover, which is a measure of how effectively capital is being used by a firm to generate revenue.

Quiz 5: Competitive Advantage, Firm Performance, and Business Models

In the why, what, who, and how of business models framework, the why dimension asks "why does the business model create value?"

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

Which of the following statements correctly compares Apple and Microsoft in 2016?

Once a firm chooses a business model, it must stick with it for the life of the firm.

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

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

A firm will always see its stock price appreciate when it demonstrates measurable growth.

A sustainable strategy is one that produces a competitive advantage that can be maintained over time.

Generally speaking, a firm will create value if its return on invested capital (ROIC) is less than the cost of capital.

Competitive advantage goes to the firm that maximizes the difference between the cost of producing a good and the retail price that consumers pay.

A company's total asset base consists of its current assets plus plant, property, and equipment (PPE).

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

Managers must first develop a strategy that is likely to produce a competitive advantage before implementing a balanced scorecard approach.

A manager's only responsibility is to monitor and assess the performance of his or her firm.

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

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

Which of the following statements is true of accounting data?

The efficient market hypothesis suggests that the market price of a firm's stock is an objective indicator of a firm's past, current, and expected future performance.

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