Chapter: Chapter 06: Return on Invested Capital
Multiple Choice
1. Which of the following is NOT one of Michael Porter’s five forces?
a) Threat of entry.
b) Regulatory restrictions.
c) Bargaining power of buyers.
d) Bargaining power of suppliers.
2. Which of the following industries is most likely to have the lowest ROIC (where goodwill has
been removed)?
a) Software.
b) IT services.
c) Pharmaceuticals.
d) Paper packaging.
3. A firm’s additional costs for producing each additional unit of its product are essentially zero.
The best term for describing the firm’s product is that it is:
a) A Giffen good.
b) A normal good.
c) A scalable product.
d) An inferior good.
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4. Given that a company charges $10 per unit, has a cost per unit of $9.10 and a tax rate of 28
percent, and requires $4.50 of invested capital per unit, what is the ROIC?
a) 3.82 percent.
b) 5.18 percent.
c) 9.44 percent.
d) 14.40 percent.
5. Given that a company charges $3.40 per unit, has a cost per unit of $1.80 and a tax rate of 32
percent, and requires $16 of invested capital per unit, what is the ROIC?
a) 6.8 percent.
b) 10.2 percent.
c) 15.6 percent.
d) 30.3 percent.
6. Which of the following are sources of competitive advantage that allow a firm to charge a
price premium?
I. Quality.
II. Customer lock-in.
III. Innovative products.
IV. Rational price discipline.
a) I and II only.
b) I, III, and IV only.
c) II and III only.
d) I, II, III, and IV.
7. Which of the following are strategies that will most likely support a sustainable ROIC?
I. Extend life cycles of products and services.
II. Offer generic products.
III. Implement a temporary cost-reduction program.
IV. Use established brands to launch new products.
a) I and IV only.
b) I, III, and IV only.
c) II and III only.
d) I, II, III, and IV.
8. Cereal manufacturers have been successful at branding their products, while meat producers
have been unable to do so to a large degree. Based on this fact, which of the following is the
most accurate concerning the pricing advantage that cereal manufacturers have over meat
producers?
a) The ROIC for cereal manufactures is less than that of meat producers because branding does
not create value and branding has a cost.
b) The ROIC for cereal manufactures is equal to that of meat producers because the costs and
benefits reach an equilibrium.
c) The ROIC for cereal manufactures is twice as high as that of meat producers.
d) The ROIC for cereal manufactures is three times as high as that of meat producers.
9. ROICs tend to be mean reverting, but firms tend to sustain their relative position to the mean
(i.e., either higher or lower) for 10 years or more.
10. Historically, the rates of growth of firms tend to be more stable than their ROICs.
11. Compared to industries where firms produce generic products, firms in industries where
they can brand their products generally earn higher ROICs.
12. Cost efficiencies offer any business the greatest scope for achieving an attractive ROIC, but
they are usually more difficult to achieve than price premiums.
13. Certain industries are biased toward earning either high, medium, or low returns, but there
is still significant variation in the rates of return for individual companies within each industry.
14. Both ROIC including goodwill and ROIC excluding goodwill have been increasing at a similar
rate.
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15. Competitive advantages based on brands, as in the consumer goods industry, are often
more important for long-term value creation than advantages based on product quality or
innovation.
16. Within the broader health care sector, ROIC can be declining for health-care facility
companies but increasing for health-care equipment companies.
17. List and briefly explain the five sources of price premiums.
Ans: [1. Innovative products can command a premium if a company has products that have a