Question 1

Basing management decisions on economic profit (e.g.Economic Value Added)rather than accounting profit is more important for companies with few fixed assets (such as software companies and consulting firms)than capital-intensive companies such as chemical companies and vehicle manufacturers.

Accepted Answer

Economic profit, which accounts for the cost of capital, is important for all companies, including capital-intensive ones, as it provides a more accurate measure of true profitability and value creation than accounting profit, which does not consider the cost of capital.

Question 2

Maximizing profit over the life of the firm bears no relationship to the goal of maximizing shareholder value.

Accepted Answer

Maximizing shareholder value is a long-term goal for a firm and it requires the firm to maximize profits over the life of the firm. Therefore, the two goals are closely related.

Question 3

If a firm is to achieve superior profit performance,it is essential that profitability targets are set for managers.If managers focus on the drivers of profitability rather than profitability itself,their efforts will be diffused.

Accepted Answer

Focusing on the drivers of profitability, such as customer satisfaction, product quality, and operational efficiency, can lead to a more sustainable and holistic approach to improving profitability. This approach helps in addressing the root causes that contribute to financial performance, rather than just the symptoms.

Question 4

Estimating a firm's future cash flows is a fairly straightforward task.

Accepted Answer

Estimating a firm's future cash flows involves a significant amount of uncertainty and requires analysis and understanding of various factors, including industry trends, the competitive landscape, and macroeconomic conditions. Hence, it is not a straightforward task.

Question 5

The entrepreneurs who create business enterprises are motivated primarily by the desire for personal wealth.

Accepted Answer

While personal wealth can be a motivating factor for some entrepreneurs, it is not the primary motivation for all of them. Many entrepreneurs are driven by a desire to solve a problem, make a positive impact, or pursue a passion, among other reasons.

Question 6

Firms are often constrained from pursing goals other than profit maximization by the pressure of competition and threat of acquisition.

Accepted Answer

Firms operate in a competitive marketplace where they have to constantly strive to maximize their profits in order to survive and grow. They face competition from other firms in the market, and the threat of being acquired by a larger company if they do not perform well. As a result, firms are often constrained from pursuing goals other than profit maximization.

Question 7

For a firm to pursue stakeholder interests rather than shareholder interests requires that it maximizes value for all stakeholders rather than maximizes value for shareholders alone.The tools of stakeholder analysis mean that this is not a major problem for management.

Accepted Answer

Stakeholder analysis tools can help identify and understand stakeholder interests, but balancing and maximizing value for all stakeholders is complex and often involves trade-offs, making it a challenging task for management.

Question 8

Economic profit is a better indicator of a firm's performance than accounting profit because economic profit takes into account the normal expected return to capital.

Accepted Answer

Economic profit subtracts the opportunity cost of using resources, including the normal expected return to capital, while accounting profit only subtracts explicit costs. Therefore, economic profit provides a more accurate measure of a firm's true profitability.

Question 9

The balanced scorecard is primarily a tool for implementing the stakeholder view of the firm.

Accepted Answer

The answer of The balanced scorecard is primarily a tool...

Question 10

Adam Smith's notion of the "invisible hand" refers to the ability of the price mechanism to align the interests of individuals with those of society-by pursuing their own interests self-interested individuals also further the overall good of society.

Accepted Answer

The answer of Adam Smith's notion of the "invisible hand"...

Question 11

According to Milton Friedman,the social purpose of a business is to make profit.

Accepted Answer

Milton Friedman famously argued that a business's social responsibility is to increase profits for its shareholders, rather than to serve any broader societal goals. He believed that businesses should focus solely on making money and let the government and other organizations handle social and environmental issues.

Question 12

Disaggregating return on capital employed into sales margin and capital turnover offers a useful stating point for diagnosing firm performance.

Accepted Answer

Disaggregating return on capital employed into its components can help identify whether a firm's profitability is due to a high sales margin, a high capital turnover, or a combination of both. This information can be useful for identifying areas where the firm could potentially improve its performance.

Question 13

Since the long term is a series of short terms,short term profit maximization will always lead to long term profit maximization.

Accepted Answer

Short term profit maximization can be achieved at the expense of long term profitability, such as ignoring investments in research and development or neglecting employee training and development.

Question 14

In practice,pursuing stakeholder interests and pursuing shareholder interests are identical since in order to make profits a firm must satisfy all its stakeholders.

Accepted Answer

Pursuing stakeholder interests and pursuing shareholder interests are not always identical. Shareholders are only one type of stakeholder, and their primary interest is to maximize their return on investment, which may not align with the interests of other stakeholders such as customers, employees, suppliers, or the broader community. While making profits is important for the long-term success of a firm, it is possible for a company to prioritize shareholder interests at the expense of other stakeholders, leading to negative consequences for the company's reputation and financial performance. Therefore, it is important for firms to consider and balance the interests of all stakeholders in their decision-making processes.

Question 15

The main difficulty of selecting performance targets for a firm is that performance goals tend to be long term,but effective monitoring must be short term.

Accepted Answer

Performance targets are usually set for a longer period of time, such as years, but in order to monitor progress towards those targets, shorter-term measures must be used, such as weekly or monthly reports. This creates the difficulty of balancing long-term goals with short-term monitoring.

Question 16

"Value" refers to the estimated monetary worth of a product or asset.

Accepted Answer

This is the definition of value.

Question 17

A firm's Value Added is the difference between the value of its outputs and the costs of the inputs purchased by the firm to provide these outputs.

Accepted Answer

The answer of A firm's Value Added is the difference...

Question 18

To assess the profitability of a company it is usually better to use profitability ratios based upon balance sheet items (such as return on equity or return on capital employed)than portability ratios based upon sales (such as operating margin or net margin).

Accepted Answer

Profitability ratios based on sales, like operating margin or net margin, directly measure how efficiently a company converts sales into profits, providing a clear view of operational performance. Ratios based on balance sheet items offer a broader perspective but may not directly reflect operational efficiency.

Question 19

Because profit is defined by accounting rules and measured in financial statements,profit maximization is an unambiguous performance goal for a firm.

Accepted Answer

Profit maximization may not always be the primary goal of a firm, as it may have other objectives such as growth, market share, or social responsibility. Additionally, the accounting rules and financial statements may not capture all the costs and benefits of a firm's actions, leading to potential conflicts between short-term profitability and long-term sustainability.

Question 20

Stock market capitalization offers the best available indicator of the net present value of a firm's future free cash flows.

Accepted Answer

Stock market capitalization represents the total value of a company's outstanding shares of stock, which is based on the perceived value of the company's future earnings potential. Therefore, it can be considered an indicator of the net present value of a firm's future free cash flows.

Quiz 2: Goals,values and Performance