Deck 6: Return on Invested Capital

Question 1

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.

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

Answer 1

A

Question 2

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

Answer 2

False

Question 3

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

Answer 3

False

Question 4

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.

Question 5

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?

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

Question 6

List and briefly explain the five sources of price premiums.

Question 7

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

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

Question 8

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.

Question 9

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

Question 10

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

Question 11

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.

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

Question 12

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

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

Question 13

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

Question 14

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?

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 15

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?

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

Question 16

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.

Question 17

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:

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