Ques Bank Contemporary Strategy Analysis Text

[See p.39]
a. The fact that in today’s intensely competitive markets, firms must focus on profit maximization in
order to survive.
*b. The external pressures on firms for profitability that arises from (i) strong competition in product
markets and (ii) the threat that firms that do not maximize profits will be acquired by forms that do.
c. The legal requirement on Boards of Directors to ensure that companies are operated in the interests
of their shareholders.
d. Shareholder pressure on CEOs to maximizing profits.

33. The principal difference between accounting profit and economic profit is:
[See p.40]
a. Accounting profit is distorted by the arbitrary treatment of depreciation and unusual items.
*b. Accounting profit includes both economic profit and the normal return on capital to the providers of
equity capital.
c. Economic profit is cash flow based and is, hence, less subject to manipulation that accounting profit.
d. Economic profit is endorsed by economists who tend to be more rigorous than accountants.

34. The divergence between accounting profit and economic profit is likely to:
[See p.41]
a. Greater for highly leveraged firms than for equity-financed firms
b. Greater for labor-intensive firms than for capital-intensive firms
*c. Greater for capital-intensive firms than for labor-intensive firms
d. Greater for technology-based firms than firms in mature industries

35. Profit and value of the firm are two concepts which are:
[See pp.41-42]
a. Unrelated because cash flow not profit is the main determinant of firm value
*b. Closely linked because the present value of a firm’s future profits approximates to the market value
of its securities
c. Closely linked because dividends are paid out of profits and it is dividends that determine the market
value of a firm’s shares
d. Closely linked because the market value of a firm is determined by its profits multiplied by the price-
earnings ratio of its shares

36. The main difference between accounting measures of firm performance and stock-market measures
of firm performance is:
[See pp.43-44]
a. Accounting measures are less reliable because of firms’ discretion over how they apply accounting
conventions
b. Stock market measures are less reliable because share prices are so volatile
c. Accounting data offers a sound basis for forecasting future performance
*d. Accounting measures are backward looking; stock market measures are forward looking

37. Maximizing enterprise value and maximizing shareholder value are closely linked because:
[See p.40]
a. Enterprise value and shareholder value are the same thing
b. Shareholder value is calculated by adding debt and other non-equity financial claims to the DCF
value of the firm
*c. Shareholder value is calculated by subtracting debt and other non-equity financial claims from the
enterprise value of the firm

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d. It is obvious that they must be linked

38. To assess the adequacy of the return on capital employed (ROCE) that a firm earned in its most
recent financial year, which of the following would not be an appropriate benchmark:
[See pp.44-45]
a. The ROCE earned by the same firm in previous years
b. The ROCE earned by competitors during the same period
*c. The firm’s cost of equity capital
d. The firm’s weighted average cost of capital

39. To assess whether or not a firm is earning an adequate rate of profit, return on capital employed
(ROCE) is a better indicator than return on sales because:
[See p.45]
a. Sales are more variable than capital employed
*b. Return on sales varies between industries according to their capital intensity
c. A firm’s return on sales depends upon the choice between gross margin, operating margin, and net
margin
d. ROCE is based upon cash flow

40. To diagnose the sources of a firm’s poor financial performance, it is useful to:
[See pp.45-46]
a. Focus on the firm’s cash flow statement rather than its income statement and balance sheet
b. Concentrate on sales growth and market share rather than profit data
c. Adopt a forward-looking approach through analyzing share price performance rather than looking at
backward-looking accounting statements
*d. Disaggregate overall return on capital into its component items

41. In using accounting ratios to appraise a firm’s performance, it is helpful to use:

42. In appraising a firm’s profit performance:

43. The biggest problem in designing a performance management system arises as a result of:
[See pp.45-46]
a. The tendency for performance management systems to be based entirely on financial targets
*b. A performance management system needs short-term indicators to monitor performance, yet the
ultimate goal is to enhance the long-term performance of the firm
c. Performance targets are always ineffective because individuals will “game the system”
d. The personal interests of organizational members need to be taken into account

44. The Balanced Scorecard is a technique of performance management that establishes and monitors
four dimensions of performance:

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[See p.49]
a. Financial, strategic, operational, and ethical performance
*b. Financial, customer, internal, and learning/innovation performance
c. Profit, sales, productivity, and asset management performance
d. Shareholder, customer, employee, supplier, and social performance

45. The main problem of a company establishing shareholder value creation as its primary performance
goal is:
[See pp.49-51]
a. Shareholder value maximization is appropriate only for financial service companies
b. Pursuing shareholder value inevitably leads to unethical behavior by senior managers
*c. Focusing on shareholder value does not necessarily encourage managers to concentrate on the
actions and activities that create the profits that are the source of shareholder value
d. Pursuing shareholder value is likely to be detrimental to employee morale and customer satisfaction

46. Influential scholars such as Milton Friedman, Charles Handy, Michael Porter and CK Prahalad:
[See p.49]
a. Agree that CSR is an essential “moral imperative”
*b. Have fundamental disagreements about the justification for CSR
c. Believe that the capitalist system would operate better if all firms adopted CSR
d. Regard most firms’ CSR initiatives as primarily exercises in public relations

47. Michael Porter and Mark Kramer’s notion of “shared value” reconceptualises CSR (corporate
social responsibility) by emphasizing:
[See p.50]
*a. CSR as a value creating activity.
b. CSR as a source of legitimacy for a company.
c. CSR a means of transferring value from shareholders to less fortunate members of society.
d. CSR as a counterweight to greed and amorality among managers and investors.

48. Which of the following activities by Starbucks Inc. is least likely to be an example of Michael
Porter and Mark Kramer’s “shared value creation”?
[See p.54]
*a. The 2015 “Race Together” initiative to combat racism and promote racial harmony
b. The introduction in 2014 of college tuition benefits to employees
c. Participating in the Coffee and Farm Equity program to benefit growers
d. Financial and media support for American Red Cross efforts to aid refugees

49. In new product development, a “phases and gates” approach means that:
[See p.56]
a. A firm’s market is divided into specific segments (or “phases”) linked by “gates” which allow
synergies to be exploited
b. A firm’s product development relies on time segments that must be linked through gates
*c. The process is divided into consecutive stages, at the end of each a decision is made as to whether
to continue to the next stage of development
d. The product is divided into separate modules where the interface between them are viewed as gates

50. Viewing strategy as a portfolio of options rather than a portfolio of investments relies upon the
rationale that:
[See pp.55-56]
a. Uncertainty means that flexibility is valuable
b. Committing to a long-term program of investment can be disastrous if circumstances change

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c. Most investment projects can be divided into a sequence of stages where, at any point of time, it is
only necessary to decide the next stage
*d. All of these

51. The value of a real option can be calculated using:

52. The two main categories of real options are growth options and flexibility options. Which of the
following investments is not a growth option?
[See pp.56-57]
*a. Ford’s acquisition of programmable robots that allow different models of car to be produced on a
single assembly line
b. Facebook’s acquisition of WhatsApp 2014
c. Apple’s program of research into virtual reality
d. Callaway Golf’s strategic alliance with Automobili Lamborghini to develop new composite
materials

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