Question

REVIEW

1. Key elements of a good performance measure includes all but which of the following?

A. Measure considers risk associated with investment decisions.

B. Measure is not sensitive to the choice of accounting methods.

C. Measure should focus on actual results instead of expected or predicted results.

2. Based on Porter's Five Forces, a beer company that has a single supplier of hops, but distributes its product among many retail clients has a threat based on:

A. new entrants.


B. bargaining power of suppliers.

C. bargaining power of customers.

3. Which of the following is not one of Porter's Five Forces?

A. The threat of new entrants.


B. The threat of complements.


C. The bargaining power of regulators.

4. Economic profit is best described as the difference between revenues and costs, where costs include:

A. all cash outlays.

B. all accrued expenses.

C. both direct expenses and the cost of capital.

5. Cash operating taxes are best described as:

A. tax expense, less deferred taxes.

B. taxes actually paid during the period.

C. taxes calculated based only on the results of operations.

6. When calculating net operating profit after taxes, depreciation is:

A. ignored.

B. added back to operating income.

C. subtracted from operating income.

7. Suppose the risk free rate of interest is 4% and the market risk premium is 5%. A company with a stock beta of 1.2 has a cost of equity closest to:

A. 1.2%.

B. 6%.

C. 10%.

8. A company with a marginal tax rate of 35% and a yield on any new debt issuance of 8% has an after-tax cost of debt closest to:

A. 2.8%.


B. 5.2%.


C. 8.0%.


9. Market value added is best described as the:


A. market value of the firm, less invested capital.


B. market value of equity, less the book value of equity.

C. sum of the market value of equity and the market value of debt.

10. Which of the following statements is incorrect?

A. In practice, the calculation of economic profit is determined based on GAAP.

B. The market value added is the difference between the market value of the firm and the invested capital.

C. The calculation of economic profit considers the cost of capital, whereas the calculation of accounting profit does not.

Answer 1

2. B. bargaining power of suppliers

3. B. The threat of complements. Porters sixth force.

4. C. both direct expenses and the cost of capital. Economic profitis reflects both direct and indirect costs, while accounting profit considers only explicit costs.

5. C. taxes calculated based only on the results of operations

6. B. added back to operating income.

7. C. 10%.

(R_f + (Rm – R_f) * β = 10%,  (Rm – R_f) = Market Risk Premium

8. B. 5.2%

.08 * (1-0.35) = 0.052 = 5.2%

9. B. market value of equity, less the book value of equity

10. B. The market value added is the difference between the market value of the firm and the invested capital.