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Honors Business Policy > Chapter 5 - Test 2 > Flashcards

Chapter 5 - Test 2 Flashcards

1
Q

Three traditional frameworks to measure and assess firm performance

A
  • Accounting profitability
  • Shareholder value creation
  • Economic value creation
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2
Q

Two integrative frameworks, combining
quantitative data with qualitative assessments

A
  • Balanced scorecard
  • Triple bottom line
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3
Q

Three Standard Performance Dimensions

A
  • What is the firm’s accounting profitability?
  • How much shareholder value does the firm create?
  • How much economic value does the firm generate?
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4
Q

Reflected in the firm’s stock price

A

Accounting profitability and economic value creation
tend to be reflected

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5
Q

Accounting Profitability (Examples & Equation)

A

Firm performance to competitors / industry average
Ex:
- Standardized accounting metrics (GAAP, FASB)
- Form 10-K statements
- Profitability ratios
- Return on invested capital (ROIC)
- Return on equity (ROE)
- Return on assets (ROA)
- Return on revenue (ROR)

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6
Q

Return on revenue

A

How much of the firm’s sales is converted into profits

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7
Q

Working capital turnover

A

How effectively capital is being used to generate revenue

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8
Q

Elements of ROIC

A

Return on revenue & Working capital turnover

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9
Q

Return on Revenue Elements

A
  • Cost of goods sold (COGS) / Revenue
  • Research and development expense / Revenue
  • Selling, general, and administrative expense / Revenue
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10
Q

The equation for how efficiently a company can produce a good

A

Cost of goods sold (COGS) / Revenue

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11
Q

The equation for how much of each dollar earned is invested in R&D

A

Research and development expense / Revenue

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12
Q

The equation for how much of each dollar earned is invested in SG&A

A

Selling, general, and administrative expenses /
Revenue

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13
Q

Working Capital Turnover Elements

A
  • Working capital / Revenue
  • PPE / Revenue
  • Intangibles / Revenue
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14
Q

The equation for how much working capital the firm has tied up in its operations

A

Working Capital / Revenue

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15
Q

The equation for how much of a firm’s revenues are dedicated to cover plant, property, and equipment

A

PPE / Revenue

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16
Q

Limitations of Accounting Data

A
  • Historical and backward-looking
  • Does not consider off-balance sheet items
  • Focuses mainly on tangible assets
17
Q

Shareholders

A

Own shares of stock, are legal owners of public companies

18
Q

Risk Capital

A

The money provided for an equity share and cannot be recovered if a firm goes bankrupt

19
Q

Total Return to Shareholders Equation

A

Stock price appreciation + dividends = Total Return to Shareholders

20
Q

Market Capitalization Definition & Equation

A

Dollar value of total shares outstanding
- Number of outstanding shares x share price

21
Q

Limitations of Shareholder Value Creation

A
  • Stock prices can be volatile
  • Macroeconomic factors affect stock prices
  • Stock prices can reflect the mood of investors
22
Q

Economic Value Creation Equation

A

A buyer’s willingness to pay for a product / service and the firm’s total cost to produce it = Economic Value Creation

23
Q

Limitations of Economic Value Creation

A
  • We must estimate economic value
  • Valuing a consumer good isn’t easy
  • The value of a good changes
24
Q

The Balanced Scorecard

A

Helps managers achieve their strategic objectives using internal and external performance metrics to balance both financial and strategic goals

25
Q

Examples of Metrics for the Balanced Scorecard

A
  • Customers
  • Value Creation
  • Core Competencies
  • Shareholders
26
Q

Advantages of the Balanced Scorecard

A
  • Links strategic vision to responsible parties
  • Translates vision into measurable goals
  • Designs and plans business processes
27
Q

Disadvantages of the Balanced Scorecard

A
  • Focused on implementation, not formulation
  • Lacks how to get back on track for deviations
  • Lacks guidance (Which metrics to use & How to address setbacks)

Honors Business Policy (16 decks)

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