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WPC 480 Quiz 2 Questions With Complete Solutions

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WPC 480 Quiz 2 Questions With Complete Solutions 2. Compare and benchmark their firm's performance to other competitors in the same industry or against the industry average. (ROIC) Return on investment capital= ROIC=(Net profits/ Invested capital) *Popular metric because it is a good proxy f...

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  • October 23, 2024
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  • 2024/2025
  • Exam (elaborations)
  • Questions & answers
  • WPC 480
  • WPC 480
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WPC 480 Quiz 2 Questions With Complete
Solutions

2. Compare and benchmark their firm's performance to other competitors in the same industry or

against the industry average.




(ROIC) Return on investment capital= ROIC=(Net profits/ Invested capital)




*Popular metric because it is a good proxy for FIRM PROFITABILITY




*The ratios measures how effectively a company uses it TOTAL INVESTED CAPITAL




Total Invest Capital, consists of two components: 1. SHAREHOLDERS' EQUITY

through the selling of share to the public




2. INTEREST-BEARING DEBT through borrowing from financial institutional bondholders




Rule of thumb for ROIC (Return on investment capital) If a firm's ROIC is greater than its

cost of capital, it generate value:

, WPC 480 Quiz 2 Questions With Complete
Solutions
If it is less than the cost of capital, the firm destroys value




Return on Revenue (ROR)= (Net profits/revenue)




Working Capital Turnover= (Revenue/ Working Capital)




Return on Revenue (ROR) three financial rations: -Cost of goods sold (COGS) / Revenue.


*Indicates how efficiently a company product a good




- Research & development (R&D) expense / Revenue.

*Indicates how much of each dollar that the firm earns in sales in invested in sales, general, and

administrative expenses




- Selling, general, & administrative (SG&A) expense / Revenue.




Second Component of ROIC: WORKING CAPITAL TURNOVER A measure of how

effectively capital is being used to generate revenue

, WPC 480 Quiz 2 Questions With Complete
Solutions
Higher ratios of RECEIVABLES TURNOVER (revenue/ accounts receivable) imply:

More efficient management in collecting receivable and short durations of interest-free

loans to customers (i.e. time until payments are due)




Payables turnover (revenue/accounts payable) Indicates: How fast the firm is paying its

creditors and how much it benefits from interest-free loan extended by its suppliers




Limitations of Accounting Data -All accounting data are historical and thus backward-

looking

-Accounting data do not consider off-balance sheet items

-Accounting data four mainly on tangible assets, which ar Eno longer the most important




Market Valuation is based on.. future expectations fro a firm's growth potential and

performance.




Shareholders- individuals or organizations that own one or more shares of stock in a

public company- are the legal owners of public companies.

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