Question 1

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

Accepted Answer

While seeking personal wealth may be a motivation for some entrepreneurs, it is not the primary motivation for all. Many entrepreneurs are motivated by a desire to solve a problem, make a difference in their community, or create something new and innovative.

Question 2

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

Accepted Answer

Firms are often in a competitive market and can face the threat of being acquired by other firms. This can create pressure to focus on maximizing profits, rather than pursuing other goals such as social responsibility or environmental sustainability.

Question 3

When comparing the profitability of firms in different industries,it is better to use profit margins on sales rather than profitability ratios based upon balance sheet items (such as return on equity or return on capital employed)?

Accepted Answer

False

Question 4

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

Accepted Answer

That is correct, "value" is typically used to refer to the monetary worth of a product or asset.

Question 5

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 may ignore important long-term investments that could lead to greater profits in the future. Focusing solely on short-term gains may also damage a company's reputation or relationships with customers and stakeholders, ultimately impacting long-term profits. Thus, a short-term focus does not necessarily lead to long-term profit maximization.

Question 6

In most continental European countries,company law requires boards of directors to ensure that their companies operate primarily in the interests of shareholders,while in most English-speaking countries are required to take account of employees,society,and the interests of the company as a whole.

Accepted Answer

In most continental European countries, company law requires boards of directors to take account of employees, society, and the interests of the company as a whole. In most English-speaking countries, boards of directors are primarily required to ensure that their companies operate in the interests of shareholders.

Question 7

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 and shareholder interests are not always the same. While both groups have a vested interest in the success of the company, their priorities may differ. Shareholders are primarily concerned with maximizing returns on their investment, while stakeholders may prioritize other factors such as employee welfare, sustainability, and social responsibility. A company can generate profits without fully satisfying all stakeholders, but this may not be sustainable in the long term.

Question 8

The value created by a firm is the value received by the customers for that firm's products,minus the real cost of producing the products.

Accepted Answer

The value created by a firm is indeed the value received by the customers for that firm's products, minus the real cost of producing the products. This is a fundamental concept in business and marketing.

Question 9

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 10

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

Accepted Answer

Economic profit is a more accurate measure of a firm's performance because it considers the opportunity cost of the capital and factors it into the calculation. Accounting profit only considers explicit costs and does not account for the capital invested in the business or the potential returns from investing that capital elsewhere. Therefore, economic profit provides a more comprehensive view of whether or not a business is truly profitable.

Question 11

The balanced scorecard is a useful tool for setting and monitoring performance targets for firms that pursue stakeholder goals;it is less useful for firms that seek to maximize profits over the long term.

Accepted Answer

The statement is incorrect. The balanced scorecard can be used by any firm, regardless of its primary goal. It provides a comprehensive framework for tracking performance in multiple areas, including financials, customer satisfaction, internal processes, and employee learning and growth. While maximizing profits may be the primary objective of some firms, performance in the other areas can also have an impact on long-term success and sustainability. Therefore, the balanced scorecard can be a useful tool for all types of organizations.

Question 12

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

Accepted Answer

Disaggregating return on capital employed (ROCE) into sales margin and capital turnover can provide insights into a company's performance. Sales margin measures how efficiently a company is able to convert sales into profits, while capital turnover measures how efficiently a company is using its assets to generate sales. By examining both of these factors, analysts can identify areas where the company may be underperforming and take steps to improve overall ROCE.

Question 13

A major difficulty in 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 often involve achieving a certain level of success over a longer period of time, such as increasing revenue by 10% over the next 5 years. However, effective monitoring and evaluation of progress towards these targets needs to be done on a more regular basis, such as monthly or quarterly reviews. This can create a mismatch between the long-term goals and the short-term monitoring, making it difficult to select appropriate performance targets.

Question 14

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

Accepted Answer

While profit is indeed measured in financial statements, profit maximization as a performance goal is not unambiguous. This is because there are various factors that can affect a firm's profit, such as market conditions, competition, and ethical considerations. Additionally, a focus solely on profit maximization may lead a firm to make short-term decisions that could harm its long-term sustainability and value to stakeholders. Therefore, the performance goal for a firm should not be limited to profit maximization, but include other objectives such as social responsibility, environmental sustainability, and customer satisfaction.

Question 15

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

Accepted Answer

Maximizing shareholder value is one of the key goals of a firm, and maximizing profit is one way to achieve that goal over the long term. By earning profits, a firm can reinvest in growth opportunities or pay dividends to shareholders, both of which can increase shareholder value. Maximizing profit is therefore a means to an end, which is to create value for shareholders.

Question 16

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 influenced by investors' expectations of the firm's future performance and potential to generate free cash flows. Therefore, the market capitalization can reflect the net present value of a company's future free cash flows. However, it is important to note that the stock market's valuation of a company can be influenced by various factors, such as market conditions, investor sentiment, and company-specific events, and may not always reflect its actual intrinsic value.

Question 17

Implementing stakeholder value maximization is not inherently more difficult than implementing shareholder value maximization since the decision tools of management can easily be adapted to serve the interests of all the firm's stakeholder groups.

Accepted Answer

Implementing stakeholder value maximization requires the firm to consider a wider range of interests and trade-offs beyond just maximizing profits for shareholders. This can require more complex decision-making processes and trade-offs between competing stakeholder interests. While management decision tools can be adapted for stakeholder value maximization, it may be more difficult to balance the interests of multiple stakeholder groups than just maximizing shareholder value.

Question 18

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 19

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

Accepted Answer

Estimating a firm's future cash flows involves analyzing various economic, financial, and market factors that can affect the firm's revenue, expenses, and profitability. This involves making assumptions about future trends and events that may not be certain or easily predictable, such as changes in consumer preferences, competitive landscape, regulatory environment, and macroeconomic conditions. Therefore, estimating future cash flows is a complex and often uncertain task that requires careful analysis and judgement.

Question 20

If a firm to pursue stakeholder interests rather than shareholder interests,it means that it maximizes value received by all stakeholders rather than the value received by shareholders alone.

Accepted Answer

Pursuing stakeholder interests means considering the interests of all stakeholders including customers, employees, suppliers, and the community in addition to shareholders, rather than prioritizing shareholder interests alone. Maximizing value for all stakeholders can lead to long-term success and sustainability for the company.

Quiz 2: Goals, Values, and Performance