Deck 15: Value-Creation Metrics

Question 1

Which three of the following are drawbacks to using accounting figures to judge managerial performance?

A) Earnings per share growth can lead to loss of value if the time value of money is not accounted for.
B) Figures for earnings per share are not used by institutional investors as a criterion for judging managerial performance.
C) Earnings per share growth fails to take account of the investment needed to generate that growth.
D) Focusing purely on the growth in earnings fails to take account of the risk of those earnings.

Answer 1

A, C, D

Question 2

What is the annual value creation for a firm which has a required rate of return of 13 per cent, an actual rate of return of 15 per cent, and an investment of £2,000,000?

A) £40,000
B) £1,000
C) £10,000
D) £4,000

Answer 2

A

Question 3

Which three of the following are key elements of value creation?

A) Required rate of return
B) Amount of capital invested
C) Actual rate of return
D) Profit per share

Answer 3

A, B, C

Question 4

Which three of the following are major flaws in earnings- based management?

A) It ignores the riskiness of earnings.
B) It assumes that shareholder value can only be determined in terms of earnings.
C) It ignores the time value of money.
D) Profit figures are subjective, and thus open to manipulation and distortion.

Question 5

Which of the following best explains when value is created?

A) When the return on an investment is less than is required for that risk class
B) When the return on an investment is greater than is required for average investments
C) When the expected return on an investment is greater than is required for that risk class
D) When the risk level on an investment is higher than is required for that return

Question 6

Which three of the following are the key steps of value- based management?

A) Create a mission statement
B) Maximise current earnings
C) Manage actively to create shareholder value
D) Measure shareholder value

Question 7

Which three of the following are elements of the value action pentagon?

A) Raise investment in positive spread units
B) Decrease return on existing capital
C) Extend the planning horizon
D) Lower the required rate of return

Question 8

Shareholder value is driven by four key elements. One of them is the required rate of return. What are the other three?

A) The planning horizon
B) The amount of capital invested
C) The level of risk
D) The actual rate of return on capital

Question 9

Which of the following is the most effective way of rewarding managers if the company adopts a value- based approach?

A) For meeting long- term objectives based on accounting rates of return
B) For meeting short- term objectives based on accounting rates of return
C) For contributing to shareholder value over a short time horizon
D) For contributing to shareholder value over a long time horizon

Question 10

Which three of the following are likely to result from managers focusing on accounting rates of return?

A) Short- termism
B) Extensive investment in the long term
C) Reduction in value in the long- term
D) Reluctance to invest in new equipment

Question 11

Which two questions must managers with a value- based focus ask if they are considering a poorly performing subsidiary?

A) Should cash be invested in other activities or given back to shareholders to invest elsewhere in the stock market?
B) How can cash be transferred from other parts of the firm to improve the figures?
C) How can the cash flow be increased?
D) Could greater wealth be generated by closure or selling the operation?

Question 12

What is the overriding purpose of value- based management?

A) Short- term maximisation of shareholder wealth
B) Long- term maximisation of profit
C) Long- term maximisation of shareholder wealth
D) Short- term maximization of wealth for all stakeholders

Question 13

Which are the three primary strategic determinants of a strategic business unit's ability to create value?

A) Life cycle stage of value creation
B) Industry attractiveness
C) Quality of marketing
D) Quantity of marketing

Question 14

Which two of the following actions would be classed as 'capitalisation'?

A) Removing funds from the equity capital to create 'profit' in the balance sheet
B) Taking an item of expenditure on to the balance sheet and capitalising it as an asset
C) Taking an item of expenditure and writing it against profit as an expense
D) Increasing the firm's capital by issuing shares

Question 15

Which two statements apply to the use of a value- based approach in a company?

A) It touches almost all aspects of organisational life.
B) It only relates to the setting of strategic objectives.
C) It must be adopted throughout the organisation.
D) It is a technique employed by a few financial experts in the company.

Question 16

If a firm focuses on accounting rates of return, what is likely to be the result?

A) Increased long- term profit
B) Short- termism
C) High levels of risk
D) Long- termism

Question 17

Which of the following terms is used to denote the difference: Actual rate of return on capital - Required return?

A) Time- related rate of return
B) Outcome return
C) Performance spread
D) Real rate of return

Question 18

What trends can generally be observed in shareholder value as the market share of the firm output increases?

A) It rises in proportion with the market share.
B) It falls, reaches a minimum and then rises.
C) It rises, reaches a maximum and then falls.
D) If falls in inverse proportion with the market share.

Question 19

A planned project is predicted to increase shareholder wealth but with an associated increase in the level of risk. What will the shareholders reaction be?

A) They will require a lower discount rate.
B) They will adopt a longer time- frame.
C) They will require a lower performance spread.
D) They will require a higher discount rate.

Question 20

A manager states that "We must be creating wealth. To do so we're creating steady growth in earnings." What would you reply?

A) "That only creates wealth if the rate of return on the additional investment is greater than the required rate."
B) "Wealth creation is occurring, but the company would do better if we focused on cash flow."
C) "That's right."
D) "Growth in earnings is only relevant if it occurs without investment."

Question 21

What is the main failing of examining earnings per share growth as an indicator of success?

A) It does not take account of the investment needed and risk taken to generate that growth.
B) It inevitably leads to long- termism.
C) It ignores the levels of cash flow and profit.
D) It exaggerates the importance of the investment needed to generate that growth.

Question 22

Which three of the following are tasks to be carried out when actively managing to create shareholder value?

A) Identifying sources of value
B) Writing a mission statement
C) Target setting
D) Allocating resources