Question 1

A firm's additional costs for producing each additional unit of its product are essentially zero.The best term for describing the firm's product is that it is:

Accepted Answer

A) A Giffen good. 
B) A normal good. 
C) A scalable product. 
D) An inferior good. 
A) A Giffen good. 
B) A normal good. 
C) A scalable product. 
D) An inferior good. C

Question 2

Which of the following industries is most likely to have the lowest ROIC (where goodwill has been removed)?

Accepted Answer

A) Software. 
B) IT services. 
C) Pharmaceuticals. 
D) Paper packaging. 
A) Software. 
B) IT services. 
C) Pharmaceuticals. 
D) Paper packaging. D

Question 3

List and briefly explain the five sources of price premiums.

Accepted Answer

1.Innovative products can command a premium if a company has products that have a patent or are difficult to copy.
2.Quality means a real or perceived difference between one product or service and competitors,for which consumers are willing to pay a higher price.
3.Branding is similar to quality,and the premiums would be highly correlated.After a product has been established,brand may count more than quality in the ability to charge a price premium.
4.Customer lock-in refers to making it costly for customers to replace the product a company sells with the product of another company.
5.Rational price discipline can allow for premiums if the sellers can discipline themselves to not compete prices down.Usually there has to be a barrier to entry to the industry to allow this.

Question 4

Cereal manufacturers have been successful at branding their products,while meat producers have been unable to do so to a large degree.Based on this fact,which of the following is the most accurate concerning the pricing advantage that cereal manufacturers have over meat producers?

Accepted Answer

A) The ROIC for cereal manufactures is less than that of meat producers because branding does not create value and branding has a cost. 
B) The ROIC for cereal manufactures is equal to that of meat producers because the costs and benefits reach an equilibrium. 
C) The ROIC for cereal manufactures is twice as high as that of meat producers. 
D) The ROIC for cereal manufactures is three times as high as that of meat producers. 
A) The ROIC for cereal manufactures is less than that of meat producers because branding does not create value and branding has a cost. 
B) The ROIC for cereal manufactures is equal to that of meat producers because the costs and benefits reach an equilibrium. 
C) The ROIC for cereal manufactures is twice as high as that of meat producers. 
D) The ROIC for cereal manufactures is three times as high as that of meat producers.

Question 5

Both ROIC including goodwill and ROIC excluding goodwill have been increasing at a similar rate.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following is NOT one of Michael Porter's five forces?

Accepted Answer

A) Threat of entry. 
B) Regulatory restrictions. 
C) Bargaining power of buyers. 
D) Bargaining power of suppliers. 
A) Threat of entry. 
B) Regulatory restrictions. 
C) Bargaining power of buyers. 
D) Bargaining power of suppliers.

Question 7

Given that a company charges $10 per unit,has a cost per unit of $9.10 and a tax rate of 28 percent,and requires $4.50 of invested capital per unit,what is the ROIC?

Accepted Answer

A) 3.82 percent. 
B) 5.18 percent. 
C) 9.44 percent. 
D) 14.40 percent. 
A) 3.82 percent. 
B) 5.18 percent. 
C) 9.44 percent. 
D) 14.40 percent.

Question 8

Given that a company charges $3.40 per unit,has a cost per unit of $1.80 and a tax rate of 32 percent,and requires $16 of invested capital per unit,what is the ROIC?

Accepted Answer

A) 6.8 percent. 
B) 10.2 percent. 
C) 15.6 percent. 
D) 30.3 percent. 
A) 6.8 percent. 
B) 10.2 percent. 
C) 15.6 percent. 
D) 30.3 percent.

Question 9

Which of the following are sources of competitive advantage that allow a firm to charge a price premium?
I.Quality.
II.Customer lock-in.
III.Innovative products.
IV.Rational price discipline.

Accepted Answer

A) I and II only. 
B) I,III,and IV only. 
C) II and III only. 
D) I,II,III,and IV. 
A) I and II only. 
B) I,III,and IV only. 
C) II and III only. 
D) I,II,III,and IV.

Question 10

Which of the following are strategies that will most likely support a sustainable ROIC?
I.Extend life cycles of products and services.
II.Offer generic products.
III.Implement a temporary cost-reduction program.
IV.Use established brands to launch new products.

Accepted Answer

A) I and IV only. 
B) I,III,and IV only. 
C) II and III only. 
D) I,II,III,and IV. 
A) I and IV only. 
B) I,III,and IV only. 
C) II and III only. 
D) I,II,III,and IV.

Question 11

Competitive advantages based on brands,as in the consumer goods industry,are often more important for long-term value creation than advantages based on product quality or innovation.

Accepted Answer

A) True 
 B)False

Question 12

Certain industries are biased toward earning either high,medium,or low returns,but there is still significant variation in the rates of return for individual companies within each industry.

Accepted Answer

A) True 
 B)False

Question 13

ROICs tend to be mean reverting,but firms tend to sustain their relative position to the mean (i.e. ,either higher or lower )for 10 years or more.

Accepted Answer

A) True 
 B)False

Question 14

Within the broader health care sector,ROIC can be declining for health-care facility companies but increasing for health-care equipment companies.

Accepted Answer

A) True 
 B)False

Question 15

Historically,the rates of growth of firms tend to be more stable than their ROICs.

Accepted Answer

A) True 
 B)False

Question 16

Cost efficiencies offer any business the greatest scope for achieving an attractive ROIC,but they are usually more difficult to achieve than price premiums.

Accepted Answer

A) True 
 B)False

Question 17

Compared to industries where firms produce generic products,firms in industries where they can brand their products generally earn higher ROICs.

Accepted Answer

A) True 
 B)False

Exam 6: Return on Invested Capital

A firm's additional costs for producing each additional unit of its product are essentially zero.The best term for describing the firm's product is that it is:

Which of the following industries is most likely to have the lowest ROIC (where goodwill has been removed)?

List and briefly explain the five sources of price premiums.

Cereal manufacturers have been successful at branding their products,while meat producers have been unable to do so to a large degree.Based on this fact,which of the following is the most accurate concerning the pricing advantage that cereal manufacturers have over meat producers?

Both ROIC including goodwill and ROIC excluding goodwill have been increasing at a similar rate.

Which of the following is NOT one of Michael Porter's five forces?

Given that a company charges $10 per unit,has a cost per unit of $9.10 and a tax rate of 28 percent,and requires $4.50 of invested capital per unit,what is the ROIC?

Given that a company charges $3.40 per unit,has a cost per unit of $1.80 and a tax rate of 32 percent,and requires $16 of invested capital per unit,what is the ROIC?

Which of the following are sources of competitive advantage that allow a firm to charge a price premium? I.Quality. II.Customer lock-in. III.Innovative products. IV.Rational price discipline.

Which of the following are strategies that will most likely support a sustainable ROIC? I.Extend life cycles of products and services. II.Offer generic products. III.Implement a temporary cost-reduction program. IV.Use established brands to launch new products.

Competitive advantages based on brands,as in the consumer goods industry,are often more important for long-term value creation than advantages based on product quality or innovation.

Certain industries are biased toward earning either high,medium,or low returns,but there is still significant variation in the rates of return for individual companies within each industry.

ROICs tend to be mean reverting,but firms tend to sustain their relative position to the mean (i.e. ,either higher or lower )for 10 years or more.

Within the broader health care sector,ROIC can be declining for health-care facility companies but increasing for health-care equipment companies.

Historically,the rates of growth of firms tend to be more stable than their ROICs.

Cost efficiencies offer any business the greatest scope for achieving an attractive ROIC,but they are usually more difficult to achieve than price premiums.

Compared to industries where firms produce generic products,firms in industries where they can brand their products generally earn higher ROICs.

Why Value Value

Fundamental Principles of Value Creation

Conservation of Value and the Role of Risk

The Alchemy of Stock Market Performance

The Stock Market Is Smarter Than You Think

Growth

Frameworks for Valuation

Reorganizing the Financial Statements

Analyzing Performance

Forecasting Performance

Estimating Continuing Value

Estimating the Cost of Capital

Moving From Enterprise Value to Value Per Share

Analyzing the Results

Using Multiples

Valuation by Parts

Taxes

Non-operating Items, Provisions, and Reserves

Leases and Retirement Obligations

Alternative Ways to Measure Return on Capital

Inflation

Cross-Border Valuation

Case Study: Heineken

Corporate Portfolio Strategy

Performance Management

Mergers and Acquisitions

Divestitures

Capital Structure, Dividends, and Share Repurchases

Investor Communications

Emerging Markets

Valuing High-Growth Companies

Cyclical Companies

Banks

Flexibility

Filters