Chapter 19—Measuring Economic Profit Key
1. Economic profit equals
2. Economic profit equals
3. The costs of labor and land used to produce a product is
4. The objective of creating value is the same as
5. Economic profit equals
6. The financial statement that shows how revenue is converted into the bottom line is called
7. To calculate the cost of capital
8. The cost of debt can be found on a firm’s
9. The equity premium is the return
10. In 2006 Disney had
11. Economic profit is
12. Normal profit
13. The abnormal net income model defines the market value of a firm
14. Economic profits disappear quickly when a market is
15. If the return on capital is equal to the cost of capital
16. If the return on capital is less than the cost of capital
17. With free entry
18. Entry into a competitive market will continue until
19. Exit from a market will stop when
20. Stock prices change when.
21. When there is an excess of expected net income over the cost of capital
22. The speed at which abnormal net income falls to zero is called
23. Entry continues as long as
24. Increases in revenue will
25. Reducing direct costs will
26. A focus on economic profit
27. Economic profit is accounting profit minus the cost of capital.
28. Normal profit and the cost of capital are the same concept.
29. The cost of capital and interest expense are the same thing.
30. Economic profit equals NOPAY plus capital charges.
31. Capital charges equal the company’s invested capital divided by the weighted average cost of capital.
32. The income statement indicates how revenue is transformed into net income.
33. Disney earned a negative economic profit in 2006.
34. The cost of capital and the cost of debt should be identical when economic profits are positive.
35. Abnormal net income is similar to economic profit.
36. Stock prices rise when abnormal profit expectations rise.
37. Stock prices change with surprises.
38. The decay rate is the speed at which economic profits go to zero.
39. An increase in revenue causes economic profit to rise.
40. A decrease in costs may not increase economic profit.