Question 1

After trying on a dress, a consumer assesses it to be worth a maximum of $100 and is willing to pay that amount for the dress.However, the dress was priced at $80.What is the amount, $100, referred to as?

Accepted Answer

The amount, $100, is referred to as the value (V) the consumer attaches to the dress. 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 2

A watch-making company has priced one of its wrist watches 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 wrist watch?

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 3

Both Vibrant Phones Inc.and Oryxo Inc.incur a cost of $200 to manufacture a single unit of a cell phone.However, Vibrant Phones creates more economic value than what Oryxo does.What does this imply?

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 sell at a higher price than the other.

Question 4

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?

Accepted Answer

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

Question 5

Return on risk capital primarily includes:

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 6

A firm has 30 million shares outstanding, and each share is traded at $100.Also, each shareholder gets a dividend of $2000 annually.In this case, the market capitalization is _____.

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 7

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

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 8

Which of the following is an external performance metric?

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 9

The value a consumer attaches to a product or service is captured in the:

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 10

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

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 11

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 _____.

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 12

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

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 13

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?

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 14

Which of the following is NOT true of risk capital?

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 15

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

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 16

_____ 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.

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 17

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

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.

Question 18

Which of the following expressions accurately describes market cap?

Accepted Answer