Deck 19: Measuring Economic Profit

Question 1

The costs of labor and land used to produce a product is

A)administrative costs.
B)costs of goods sold.
C)net profit plus the cost of capital.
D)none of these choices.

Answer 1

costs of goods sold.

Question 2

In 2006 Disney had

A)a positive economic profit.
B)accounting profits greater than the cost of capital.
C)a negative economic profit.
D)none of these choices.

Answer 2

a negative economic profit.

Question 3

Economic profits disappear quickly when a market is

A)perfectly competitive.
B)monopolistically competitive.
C)a monopoly.
D)an oligopoly.

Answer 3

perfectly competitive.

Question 4

Entry into a competitive market will continue until

A)economic profits are zero.
B)normal profits are zero.
C)when accounting losses are zero.
D)a.and b.are true

Question 5

To calculate the cost of capital

A)it needs to know its economic profit.
B)the firm must calculate the average weighted cost of debt.
C)the firm needs to know how much debt it uses.
D)the firm needs to know how much capital is has.

Question 6

Stock prices change when.

A)expectations are based on past performance
B)expectations change.
C)accounting profits are zero.
D)none of these choices.

Question 7

Economic profit equals

A)NOPAT less capital charges.
B)NOPAT plus capital charges.
C)NOPAT plus interest payments on bonds.
D)NOPAT minus accounting profit.

Question 8

The cost of debt can be found on a firm's

A)1099 form.
B)5013c release.
C)balance sheet.
D)10K.

Question 9

Economic profit is

A)revenue - variable costs + fixed costs.
B)revenue + variable costs - fixed costs.
C)revenue - variable costs - fixed costs.
D)revenue/cost of capital.

Question 10

The equity premium is the return

A)investors expect to equal a risk free investment.
B)covered by stockholder insurance.
C)on bonds.
D)investors expect above a risk free investment.

Question 11

The abnormal net income model defines the market value of a firm

A)is its book value minus the present value of expected economic profits.
B)is its book value plus the present value of expected economic profits.
C)is its book value divided by the present value of expected economic profits.
D)is its book value multiplied by the present value of expected economic profits.

Question 12

If the return on capital is less than the cost of capital

A)economic profits are zero.
B)accounting profits are zero.
C)then accounting profits minus economic profit are zero.
D)economic profits are negative.

Question 13

Economic profit equals

A)accounting profit plus the cost of capital.
B)accounting profit minus the cost of capital.
C)accounting profit minus interest payments.
D)accounting profit plus interest payments.

Question 14

Exit from a market will stop when

A)accounting losses are zero.
B)the cost of capital is equal to the risk-free rate of return.
C)economic losses are zero.
D)none of these choices.

Question 15

If the return on capital is equal to the cost of capital

A)accounting profits are zero.
B)economic profits are negative.
C)accounting profit and economic profit are equal.
D)economic profits are zero.

Question 16

With free entry

A)economic profits are possible over the long run.
B)economic profits are possible but only over limited amounts of time.
C)economic profits are not possible.
D)the cost of capital will not be covered.

Question 17

The financial statement that shows how revenue is converted into the bottom line is called

A)the sources and uses of funds statement.
B)the Sarbanes report.
C)the income statement.
D)the balance sheet.

Question 18

Economic profit equals

A)net operating profit after taxes plus the cost of capital.
B)net operating profit after taxes divided by the cost of capital.
C)net operating profit after taxes multiplied by the cost of capital.
D)net operating profit after taxes minus the cost of capital.

Question 19

The objective of creating value is the same as

A)maximizing shareholder value.
B)maximizing profit.
C)maximizing added value.
D)all of these choices.

Question 20

Normal profit

A)is when economic profits are zero.
B)is the profit that competition will allow.
C)is the opportunity cost of capital.
D)all of these choices.

Question 21

The speed at which abnormal net income falls to zero is called

A)the balance sheet exposure.
B)the depreciation rate.
C)the decay rate.
D)the exchange rate.

Question 22

Normal profit and the cost of capital are the same concept.

Question 23

A focus on economic profit

A)will change the behavior of the firm.
B)will cause a management turnover.
C)will cause stock prices to fall.
D)will created on added value.

Question 24

The cost of capital and the cost of debt should be identical when economic profits are positive.

Question 25

The decay rate is the speed at which economic profits go to zero.

Question 26

Increases in revenue will

A)increase economic profit
B)decrease economic profit
C)may or may not affect economic profit
D)leave economic profit unchanged.

Question 27

When there is an excess of expected net income over the cost of capital

A)abnormal net income is positive.
B)accounting profits are negative.
C)abnormal net income is negative.
D)economic profits minus abnormal net income is negative.

Question 28

The cost of capital and interest expense are the same thing.

Question 29

Abnormal net income is similar to economic profit.

Question 30

Entry continues as long as

A)economic profits are zero.
B)accounting profits are positive.
C)accounting profits are positive and economic profits are negative.
D)economic profits are positive.

Question 31

Reducing direct costs will

A)increase economic profit.
B)decrease economic profit.
C)leave economic profit unchanged.
D)may or may not affect economic profit.

Question 32

Economic profit equals NOPAY plus capital charges.

Question 33

Economic profit is accounting profit minus the cost of capital.

Question 34

Capital charges equal the company's invested capital divided by the weighted average cost of capital.

Question 35

A decrease in costs may not increase economic profit.

Question 36

The income statement indicates how revenue is transformed into net income.

Question 37

Disney earned a negative economic profit in 2006.

Question 38

Stock prices rise when abnormal profit expectations rise.

Question 39

Stock prices change with surprises.

Question 40

An increase in revenue causes economic profit to rise.