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Flashcards in IX - Performance Measures Deck (80)
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What four perspectives are included in Balanced Scorecard?

Financial / Customer / Internal Business Processes / Learning and Growth


Why was Balanced Scorecard created?

To measure Performance.


What are Strategy Maps?

Diagrams of Strategic Cause and Effect Relationships.


What is a Strategic Initiative?

A plan to achieve goals.


What measures are used under Value-Based Management?

Return on Investment
Residual Income
Economic Value Added
Free Cash Flow


How is Return on Investment (ROI) calculated?

ROI : Return / Investment

Example: You Invest $100 to buy a machine that generates $60 in Operating Income

$60 / $100 : 60% ROI


How is Residual Income calculated?

Operating Income - (Required Rate of Return x Invested Capital) : Residual Income


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

RROR is also called 'Cost of Capital'


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

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%


How is Spread calculated?

Spread : ROI - Cost of Capital


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

Investments should exceed costs- with an emphasis on stockholder value.

Economic Value Added : Operating Income After Tax - (Net Assets x WACC)


How is Free Cash Flow calculated?

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


What is measured by Six Sigma?

It measures a product versus its quality goal.


What is the Asset Turnover Ratio?

Sales / Average Assets


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

Can the company pay their short-term liabilities?

Current Ratio : Current Assets / Current Liabilities


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

How is the company financing its capital?

Debt to Equity Ratio : Total Debt / Total Equity


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

What proportions of the company's assets are encumbered with debt?

Debt to Total Assets : Total Liabilities / Total Assets


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

How profitable is the product after COGS?

Gross Margin : Gross Profit / Net Sales


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

How profitable is the product after all expenses (except interest and taxes)?

Operating Profit Margin : Operating Profit / Net Sales


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

Can the company make their interest payments?

Times Interest Earned : Earnings Before Tax & Interest / Interest Expense


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

What % return are the assets generating?

Return on Assets : Net Income (net of interest & taxes) / Average Total Assets


How is Market/Book ratio calculated?

Market Value of Common Stock / Book Value of Common Stock


What is Inventory Turnover and how is it calculated?

How quickly does inventory get sold?

Inventory Turnover : COGS / Average Inventory


What is the Quick Ratio and how is it calculated?

It measures short-term liquidity- and only includes assets that are quickly available (i.e. not inventory)

Quick Ratio : (Current Assets - Inventory) / Current Liabilities


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

How many days does it take the company to collect payment on A/R?

Average Collection Period : Average AR / Average Sales Per Day


What is an Internal Failure?

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


What is an External Failure?

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

This includes recalls.


What is Appraisal Cost?

Quality control- testing & inspection costs.


SWOT analysis includes considerations of what four strategic dimensions?
-Synergies, willingness, openness, and targets
-Strengths, weaknesses, opportunities, and targets
-Synergies, weaknesses, openness, and threats
-Strengths, weaknesses, opportunities, and threats

Strengths, weaknesses, opportunities, and threats
SWOT analysis is a process of environmental scanning involving an analysis and assessment of the dimensions of strengths, weaknesses, opportunities, and threats.


V Inc. has developed and patented a new laser disc reading device that will be marketed internationally. Which of the following factors should Vince consider in pricing the device? (any combination of the 3)
I. Quality of the new device.
II. Life of the new device.
III. Customers' relative preference for quality compared to price.

All 3
All three factors are relevant in setting the price. Consider setting price for cars. The quality of the car has a direct effect on price. Perceived differences in quality are one of the most important factors by which firms set prices for different vehicles. The life of the new item is the length of time the firm has to recoup its initial investment in researching and developing the product, marketing it, and any retooling required (most of which are fixed costs). The life can also be defined as the number of units or total sales expected of the product. The longer the life (or greater the total sales expected), the lower the price can be, all other factors being the same. How customers trade off price and quality is also an important factor. If price is by far the more important factor, then increases in quality that cause the price to increase significantly will not cause sales increases. On the other hand, in the high-end auto market, some customers are willing to pay large sums to obtain significant quality increases. Thus, customer preferences for quality relative to price can affect the pricing of the product.