Performance_Measures 2

Question 1

What are Strategy Maps?

Answer 1

Diagrams of Strategic Cause and Effect Relationships.

Question 2

What is a Strategic Initiative?

Answer 2

A plan to achieve goals.

Question 3

What measures are used under Value-Based Management?

Answer 3

Return on Investment Residual Income Spread Economic Value Added Free Cash Flow

Question 4

What is another name for Required Rate of Return (RROR)?

Answer 4

RROR is also called ‘Cost of Capital’

Question 5

What is Weighted Average Cost of Capital (WACC)? How is it calculated?

Answer 5

Cost of Capital is the weighted average of the interest rates you pay for your Capital. Includes Debt and the Rate of Return your Equity Shareholders expect Example: 45% of your Capital is supported by debt and has an interest rate of 9%. 55% of your Capital is supported by equity and shareholders expect a ROR of 12% Your Cost of Capital is: (.45 x .09) + (.55 x .12) : 10.65%

Question 6

How is Spread calculated?

Answer 6

Spread : ROI - Cost of Capital

Question 7

What is the primary point of Economic Value Added? How is it calculated?

Answer 7

Investments should exceed costs- with an emphasis on stockholder value. Economic Value Added : Operating Income After Tax - (Net Assets x WACC)

Question 8

How is Free Cash Flow calculated?

Answer 8

Operating Income After Tax + Depreciation & Amortization - Capital Expenditures - Change in Net Working Capital : Free Cash Flow

Question 9

What is the Asset Turnover Ratio?

Answer 9

Sales / Average Assets

Question 10

What does the Current Ratio tell us? How is it calculated?

Answer 10

Can the company pay their short-term liabilities? Current Ratio : Current Assets / Current Liabilities

Question 11

What does the Debt to Equity Ratio tell us? How is it calculated?

Answer 11

How is the company financing its capital? Debt to Equity Ratio : Total Debt / Total Equity

Question 12

What does the Debt to Total Assets ratio tell us? How is it calculated?

Answer 12

What proportions of the company’s assets are encumbered with debt? Debt to Total Assets : Total Liabilities / Total Assets

Question 13

What does Gross Margin % tell us? How is it calculated?

Answer 13

How profitable is the product after COGS? Gross Margin : Gross Profit / Net Sales

Question 14

What does Operating Profit Margin tell us? How is it calculated?

Answer 14

How profitable is the product after all expenses (except interest and taxes)? Operating Profit Margin : Operating Profit / Net Sales

Question 15

How is Times Interest Earned calculated and what does it mean?

Answer 15

Can the company make their interest payments? Times Interest Earned : Earnings Before Tax & Interest / Interest Expense

Question 16

What does Return on Assets tell us? How is it calculated?

Answer 16

What % return are the assets generating? Return on Assets : Net Income (net of interest & taxes) / Average Total Assets

Question 17

How is Market/Book ratio calculated?

Answer 17

Market Value of Common Stock / Book Value of Common Stock

Question 18

What is Inventory Turnover and how is it calculated?

Answer 18

How quickly does inventory get sold? Inventory Turnover : COGS / Average Inventory

Question 19

What is the Quick Ratio and how is it calculated?

Answer 19

It measures short-term liquidity- and only includes assets that are quickly available (i.e. not inventory) Quick Ratio : (Current Assets - Inventory) / Current Liabilities

Question 20

What is Average Collection Period- and how is it calculated?

Answer 20

How many days does it take the company to collect payment on A/R? Average Collection Period : Average AR / Average Sales Per Day

Question 21

What is an Internal Failure?

Answer 21

Products have quality defects- but are caught BEFORE they leave the warehouse.

Question 22

What is an External Failure?

Answer 22

Product reaches the customer- but they are not satisfied with the quality of the product. This includes recalls.

Question 23

What is Appraisal Cost?

Answer 23

Quality control- testing & inspection costs.

Question 24

Theory of constraints

Answer 24

• Theory of constraints (TOC) refers to methods to maximize operating income when faced with some bottleneck operations.
  
  • Bottleneck resources are any resource or operation where the capacity is less than the demand placed upon it. Nonbottleneck resources have capacity greater than demand.
• The objective of TOC is to increase throughput contribution while decreasing investment and operating costs.
  
  • T_hroughput contribution_ is revenues minus the direct materials cost of goods sold.
  • Investment is the sum of materials, cost in direct materials, work in process and fi nished goods inventories; research and development costs; and the costs of equipment and buildings.
  • Operating costs include the salaries and wages, rental expense, utilities, and depreciation.