Ch12

Question 1

Johnson, Scholes and Whittington’s 3 tests that should be applies to strategic options before a strategy is chosen?

Answer 1

1) Suitability - is the strategy consistent, both externally and internally with existing operations?
2) Acceptability - What will be the reaction of key stakeholders?
3) Feasibility - Do we have the resources and capabilities?

Question 2

What is the formula for Gross profit margin?

Answer 2

Gross profit margin = (Gross Profit) / (Revenue)

Question 3

What is the formula for operating margin?

Answer 3

Operating margin = (Operating profit) / (Revenue)

Question 4

What is the formula for Return on capital employed (RoTE)?

Answer 4

RoTE = (Operating profit) / (Debt + Equity)

Question 5

What is the formula for the current ratio?

Answer 5

Current ratio = (Current Assets) / (Current Liabilities)

• Asses the ability to pay current labilities from current assets

Question 6

What is the formula for the quick ratio?

Answer 6

Quick ratio = (Current assets excluding inventory) / (Current liabilities)

• Assess ability to pay current liabilities from reasonably liquid assets

Question 7

What is the Gearing ratio?

Answer 7

Gearing ratio = Debt / Equity

• Assess the reliance on external finance

Question 8

What is the interest cover?

Answer 8

Interest cover = (Profit before interest payable) / (Interest payable)

Question 9

What is the formula for trade receivable days?

Answer 9

Trade receivable days = (Trade receivables) / (Revenue) *365

Question 10

What is the formula for Inventory holding period?

Answer 10

Inventory holding period = (Inventory) / (Cost of sales) *365

Question 11

What is the formula for trade payables days?

Answer 11

Trade payables days = (Trade payables) / (Purchases) *365

Question 12

Limitation of financial performance indicators? (4)

Answer 12

1) Historical
2) Only considers internal factors
3) Short term focused
4) Easily manipulated

Question 13

What is the balanced scorecard?

Answer 13

The balanced scorecard approach ensures that a mixture of financial and non-financial perspectives are considered

1) Financial perspective
2) Customer perspective
3) Internal business perspective
4) Innovation and learning perspective

Question 14

What are the 4 main categories of benchmarking?

Answer 14

1) Internal
2) Competitive
3) Activity (Best in class)
4) Generic