Competitive Analysis

Question 1

List the formula for residual income (RI).

Answer 1

Operating Income - required rate of return (invested capital).

Question 2

Define “price elasticity of demand”.

Answer 2

The percentage change in quantity demanded divided by the percentage change in price.

Question 3

Describe the prevalent value-based management (VBM) themes and concepts.

Answer 3

Accrual-based metrics are discredited; Cost of capital is increasingly emphasized; Shareholders and shareholder value as the primary element of interest is common; and relating to VBM to strategy and making linages to drivers of success is important.

Question 4

List the formula for return on investment (ROI).

Answer 4

Net Income / Total Assets.

Question 5

Describe the DuPont approach to return on investment (ROI).

Answer 5

Separates ROI into two parts for analysis - Profit Margin x Asset Turnover.

Question 6

List the formula for economic value added (EVA).

Answer 6

Net Operating Profit After Taxes (NOPAT) - Weighted Average Cost of Capital (WAAC) (Total Assets - Current Liabilities