Chapter 13

Question 1

How would you calculate the value of an investment?

Answer 1

cash flow period/(1+r)^-

The present value of the future cash flows of the investment, all discounted at a risk-adjusted discount rate.

Question 2

What are the 3 main factors that determine the value of the investment?

Answer 2

1) Profitability
2) Size and/or growth
3) Risk

Question 3

Define profitability

Answer 3

How much a company is making (net income, free cash flow, ROE, ROA); the higher it is the better

Question 4

Define size/growth

Answer 4

For an investment to be valuable it needs to have a good size, and grow over time.

Question 5

Define risk

Answer 5

the higher the risk the lower the value

Question 6

What is a durable competitive advantage for a business?

Answer 6

a strategic asset that allows a business to maintain its leadership and profitability over the long term.

Brand is an example of this

Question 7

What gives rise to a durable competitive advantage?

Answer 7

Unique resources, strategic decisions, market conditions, and sustainable business practices

Question 8

How would you recognize if a company has a durable competitive advantage?

Answer 8

The biggest one is strong brand and customer loyalty

Question 9

Define Net Profit Percentage

Answer 9

How efficiently a company converts its revenue into actual profit

Question 10

Define Total Asset Turnover

Answer 10

Shoes how efficient the company is in turning assets into sales

Question 11

Define Leverage

Answer 11

the amount of debt that the company uses to boost overall return

Question 12

Define ROA

Answer 12

Shows how successful the company is implementing its overall operating strategy

Question 13

Define ROE

Answer 13

Shows how well a company generates profit from its shareholders’ equity

Question 14

What are credit (debt) ratings?

Answer 14

assessments or evaluations of a borrower’s ability to repay debt

Question 15

What are economies of scale?

Answer 15

When producing more goods or services reduces the cost per unit, making the business more efficient

Question 16

What are the benefits of size and growth?

Answer 16

Producing more goods, become a bigger competitor, Increase revenue

Question 17

Are there any downsides to size and growth?

Answer 17

More complex, rapid growth=lost focus on what the business is about, increased costs

Question 18

How do net profit percentage and total asset turnover demonstrate the basic strategic tradeoff between charging high prices and selling high quantity?

Answer 18

Net profit percentage: high prices, high profit margin; low price, low profit margin

Total asset turnover: High prices, lower asset turnover; low prices, higher asset turnover