Question 1

________, which is the return on risk capital, includes stock price appreciation plus dividends received over a specific period.
A) Total return to shareholders
B) Earnings per share
C) Receivables turnover
D) Dividend yield

Accepted Answer

Investors are primarily interested in a company's total return to shareholders, which is the return on risk capital, including stock price appreciation plus dividends received over a specific period.

Question 2

________ is best described as the difference between a buyer's willingness to pay for a product or service and a firm's total cost to produce it.
A) Economic value created
B) Break-even point
C) Consumer surplus
D) Cost of capital

Accepted Answer

Economic value created is the difference between a buyer's willingness to pay for a product or service and the firm's total cost to produce it.

Question 3

The difference between the price charged for a product and the cost to manufacture it is referred to as the
A) consumer surplus.
B) break-even price.
C) producer surplus.
D) reservation price.

Accepted Answer

The difference between the price charged for a product (P), and the cost to produce it (C), is the profit, or producer surplus.

Question 4

Which of the following competitively important assets is typically excluded from a firm's balance sheet?
A) land and building
B) accounts payable
C) patents
D) customer experience

Accepted Answer

Today, the most competitively important assets tend to be intangibles such as innovation, quality, and customer experience, which are not included in a firm's balance sheets. Intangibles that are not captured in accounting data have become much more important in firms' stock market valuations over the last few decades.

Question 5

A firm has 30 million shares outstanding, and each share is traded at $100. Also, each shareholder gets a dividend of $2,000 annually. In this case, the market capitalization is
A) 30,000 shares, that is, 30 million shares/$100.
B) $200,000, that is, $2,000 × $100.
C) $3 billion, that is, 30 million shares × $100.
D) 20:1, that is, $2,000/$100.

Accepted Answer

Market capitalization (or market cap) captures the total dollar market value of a company's outstanding shares at any given point in time (Market cap = Number of outstanding shares × Share price). Therefore, market cap is equal to $3 billion, that is, 30 million shares × $100.

Question 6

Unlike the financial ratios based on accounting data, total return to shareholders is
A) backward-looking and historic in nature.
B) an external performance metric.
C) an absolute measure of competitive advantage.
D) unaffected by market volatility or macroeconomic factors.

Accepted Answer

Unlike accounting data, total return to shareholders is an external performance metric. It essentially 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).

Question 7

________ denotes the dollar amount a consumer would attach to a good or service.
A) Utility
B) Value
C) Consumer surplus
D) Economic contribution

Accepted Answer

Value denotes the dollar amount (V) a consumer would attach to a good or service. Value captures a consumer's willingness to pay and is determined by the perceived benefits a good or service provides to the buyer.

Question 8

Return on risk capital primarily includes
A) stock price appreciation plus dividends received over a specific period.
B) consumer surplus plus firm profit.
C) account receivables plus account payables.
D) economic value created by a firm plus reservation price.

Accepted Answer

Investors are primarily interested in a company's total return to shareholders, which is the return on risk capital, including stock price appreciation plus dividends received over a specific period.

Question 9

A watchmaking company has priced one of its wristwatches at $210. Most of its competitors sell similar watches at $180. Selling anything less than $150 would result in a loss for the company. However, the absolute maximum a customer is willing to pay for it is $170. In this scenario, what is the reservation price of the wristwatch?
A) $150
B) $180
C) $170
D) $210

Accepted Answer

The absolute maximum a customer would be willing to pay for a product is referred to as its reservation price, which in this case is $170.

Question 10

Both Saturn Technologies and Granite Inc. incur a cost of $200 to manufacture a single unit of a cell phone. However, Saturn Technologies charges a higher price than Granite Inc. does, but it still sells a higher number of phones. What does this imply?
A) Saturn Technologies and Granite have achieved a competitive parity.
B) Granite Inc. has a competitive advantage over Saturn Technologies.
C) Saturn Technologies creates more economic value than Granite Inc. does.
D) Granite Inc. is not charging enough for its product.

Accepted Answer

Economic value created is the difference between a buyer's willingness to pay for a product or service and the firm's total cost to produce it. Since the cost of production is same for both the companies, the difference in economic value can only be possible when one company has been able to create a more valuable product for which buyers are willing to pay a higher price.

Question 11

A firm incurs $100 to manufacture an office table. It fixes the market price of the table as $250, and discounts the price to $200. However, the maximum a person is willing to pay for it is $180. What is the amount of total perceived consumer benefits in this scenario?
A) $250
B) $200
C) $180
D) $100

Accepted Answer

The amount of total perceived consumer benefits equals the maximum willingness to pay, which in this case is $180.

Question 12

From an investors' or shareholders' perspective, the measure of competitive advantage that matters most is the
A) return on risk capital.
B) economic value created.
C) consumer surplus.
D) inventory turnover.

Accepted Answer

From the shareholders' perspective, the measure of competitive advantage that matters most is the return on their risk capital, which is the money they provide in return for an equity share, money that they cannot recover if the firm goes bankrupt.

Question 13

________ are the legal owners of public companies.
A) Employees
B) Shareholders
C) Category captains
D) Creditors

Accepted Answer

Shareholders-individuals or organizations who own one or more shares of stock in a public company-are the legal owners of public companies.

Question 14

The market capitalization of a public company is $5 billion. Each share of the company is traded at $200. What do you infer from this financial data?
A) The firm's number of outstanding shares is 25 million.
B) The firm pays an annual dividend of 10 percent.
C) The firm's total return to shareholder is $5 billion.
D) The firm's economic value created is $5 billion.

Accepted Answer

Market capitalization (or market cap) captures the total dollar market value of a company's outstanding shares at any given point in time (Market cap = Number of outstanding shares × Share price).

Question 15

Which of the following is an external performance metric?
A) return on revenue
B) fixed assets turnover
C) inventory turnover
D) total return to shareholders

Accepted Answer

Unlike accounting data, total return to shareholders is an external performance metric. It essentially 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).

Question 16

You are the CEO of a home appliance manufacturing company and have recently undertaken a review of your company's strategy. In comparing your stock market valuation to that of your closest competitor, you note that your firm is currently valued at $50 billion, while your competitor is valued at $40 billion. How should you proceed?
A) Consider this evidence of a sustainable competitive advantage and maintain your current strategy.
B) Compare the current valuations with past valuations to determine a trend.
C) Assume your current strategy has failed and begin to formulate a new one.
D) Compare your valuation to firms in another industry.

Accepted Answer

When assessing and evaluating competitive advantage, a comparison of rival firms' share price development or market capitalization provides a helpful yardstick when used over the long term. In order for this comparison of market capitalization to yield useful information, you must consider how it has changed over time. If your competitor has seen significant growth in market cap over the preceding year while your firm has seen its valuation decline slightly, for example, you would have evidence that your firm has begun to lose its competitive advantage.

Question 17

Which of the following expressions accurately describes market cap?
A) It is the product of the number of outstanding shares and the share price.
B) It is the difference between the book value and the market value of a firm's assets.
C) It is the ratio of a firm's equity finance and its debt finance.
D) It is the difference between a firm's account receivables and account payables.

Accepted Answer

Market capitalization (or market cap) captures the total dollar market value of a company's outstanding shares at any given point in time (Market cap = Number of outstanding shares × Share price).

Question 18

A firm incurs $400 to manufacture a television. In the market, customers are willing to pay a maximum of $600 for the television priced at $500. The difference of $200 ($600 minus $400) is the
A) consumer surplus.
B) total return to shareholders.
C) customer lifetime value.
D) economic value created.

Accepted Answer

In this scenario, the difference of $200 ($600 minus $400) is the economic value created. Economic value created is the difference between a buyer's willingness to pay for a product or service and the firm's total cost to produce it.

Question 19

Elena is the CEO of Geode Technologies, a consumer electronics manufacturer. Last year, Geode's return on invested capital (ROIC) was 11.6 percent, while Geode's closest competitor, NorthWest Tech, had an ROIC of 17 percent. Which of the following factors might Elena use to convince investors to invest in Geode rather than NorthWest Tech?
A) Geode had a Research & development (R&D) expense / Revenue ratio of 16 percent, while NorthWest Tech had an R&D / Revenue ratio of 12 percent.
B) Geode's working capital to revenue ratio was 75 percent, while NorthWest Tech's was 68 percent.
C) Geode's intangible intensity was 6 percent, while NorthWest Tech's was 3 percent.
D) Geode's plant, property, and equipment (PPE) over revenue ratio was 19 percent, while NorthWest Tech's was 10 percent.

Accepted Answer

Geode's higher Intangible intensity, or Intangibles / Revenue ratio, suggests that the company has more valuable intangible assets than NorthWest Tech. Intangible assets include a firm's intellectual property (such as patents, copyrights, and trademarks), goodwill, and brand value. A firm with significant intangible assets may be attractive to investors for its potential to generate higher returns in the future.

Question 20

Which of the following is a disadvantage of measuring firm performance through total return to shareholders and firm market capitalization?
A) Market volatility makes it difficult to assess firm performance through these measures, particularly in the short-term.
B) These tools fail to indicate how the stock market views all available public information about a firm's expected future performance.
C) These tools measure competitive advantage in absolute terms rather than relative terms.
D) Only the book value of the share prices is taken into account when applying these measures, and not the market value.

Accepted Answer

Stock prices can be highly volatile, making it difficult to assess firm performance, particularly in the short-term. This volatility implies that total return to shareholders is a better measure over the long-term due to the "noise" introduced by market volatility, external factors, and investor sentiment.

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

________, which is the return on risk capital, includes stock price appreciation plus dividends received over a specific period.

________ is best described as the difference between a buyer's willingness to pay for a product or service and a firm's total cost to produce it.

The difference between the price charged for a product and the cost to manufacture it is referred to as the

Which of the following competitively important assets is typically excluded from a firm's balance sheet?

A firm has 30 million shares outstanding, and each share is traded at $100. Also, each shareholder gets a dividend of $2,000 annually. In this case, the market capitalization is

Unlike the financial ratios based on accounting data, total return to shareholders is

________ denotes the dollar amount a consumer would attach to a good or service.

Return on risk capital primarily includes

Both Saturn Technologies and Granite Inc. incur a cost of $200 to manufacture a single unit of a cell phone. However, Saturn Technologies charges a higher price than Granite Inc. does, but it still sells a higher number of phones. What does this imply?

A firm incurs $100 to manufacture an office table. It fixes the market price of the table as $250, and discounts the price to $200. However, the maximum a person is willing to pay for it is $180. What is the amount of total perceived consumer benefits in this scenario?

From an investors' or shareholders' perspective, the measure of competitive advantage that matters most is the

________ are the legal owners of public companies.

The market capitalization of a public company is $5 billion. Each share of the company is traded at $200. What do you infer from this financial data?

Which of the following is an external performance metric?

Which of the following expressions accurately describes market cap?

A firm incurs $400 to manufacture a television. In the market, customers are willing to pay a maximum of $600 for the television priced at $500. The difference of $200 ($600 minus $400) is the

Which of the following is a disadvantage of measuring firm performance through total return to shareholders and firm market capitalization?