65) ________ are ratios with some measure of profit in the numerator and some measure of
firms’ size or assets in the denominator.
A) Liquidity ratios
B) Leverage ratios
C) Activity ratios
D) Profitability ratios
66) Ratios that focus on the level of a firm’s financial flexibility, including its ability to obtain
more debt, are known as
A) leverage ratios.
B) liquidity ratios.
C) activity ratios.
D) profitability ratios.
67) Using ratio analysis, a firm earns ________ when its performance is greater than the industry
average.
A) above average economic performance
B) below average accounting performance
C) above average accounting performance
D) below average economic performance
68) The ________ is the rate of return that a firm promises to pay its suppliers of capital to
induce them to invest in the firm.
A) cost of debt
B) cost of advantage
C) cost of parity
D) cost of capital
69) ________ measures of competitive advantage compare a firm’s level of return to its cost of
capital instead of to the average level of return in the industry.
A) Economic
B) Accounting
C) Strategic
D) Sustainable
70) The percentage of a firm’s total capital that is debt times the cost of debt plus the percentage
of a firm’s total capital that is equity times the cost of equity is the
A) weighted cost of capital.
B) weighted average cost of capital.
C) unweighted average cost of capital.
D) average cost of capital.
71) If the risk free rate of return is 4%, the market rate of return is 9%, and a firm’s beta is 2.0,
what is the firm’s cost of equity?
A) 30
B) 6
C) 18
D) 14
72) If a firm has total assets of $10 million, stockholder’s equity of $6 million, a cost of equity of
10, and an after tax cost of debt of 5%, what is the firm’s weighted average cost of capital?
A) 8
B) 18
C) 7
D) 1
73) A firm that earns its cost of capital is said to be earning
A) above normal economic performance.
B) normal economic performance.
C) below normal economic performance.
D) normal accounting performance.
74) The view that equity holders only receive payment on their investment in a firm after all
legitimate claims by a firm’s other stakeholders are satisfied is known as the ________ view of
equity holders.
A) stakeholder
B) residual claimants
C) legitimate claimants
D) extraordinary claims
75) Theories of how to gain competitive advantage in an industry that emerge over time or that
have been radically reshaped once they are initially implemented are known as
A) emergent strategies.
B) objective strategies.
C) planned strategies.
D) ad hoc strategies.
76) The realized strategy of most firms tends to be
A) almost exclusively a reflection of their intended strategy.
B) almost exclusively a reflection of their emergent strategy.
C) a combination of both intended and emergent strategies.
D) reflective of neither the firms’ intended nor emergent strategy.
77) Which of the following is a reason why it is important for students to study strategy and the
strategic management process?
A) Studying strategy and the strategic management process can give students tools to evaluate
the strategies of firms that may employ them.
B) It can be very important to a new hire’s career success to understand the strategies of the firm
that hired them and their place in implementing these strategies.
C) While strategic choices are generally limited to very experienced senior managers in large
organizations, in smaller and entrepreneurial firms many employees end up being involved in the
strategic management process.
D) All of the above.
78) ________ strategies are theories of how to gain competitive advantage in an industry that
emerge over time or that have been radically reshaped once they are initially implemented.
A) Intended
B) Realized
C) Emergent
D) Visionary
79) Which type of ratios focus on the ability of a firm to meet its short-term financial
obligations?
A) Activity ratios
B) Liquidity ratios
C) Leverage ratios
D) Profitability ratios
80) One of the first scholars to examine the longevity of competitive advantage was
A) Dennis Mueller.
B) Geoffrey Waring.
C) Peter Roberts.
D) Rich Houston.
81) Thermacorp is in the heating and cooling industry and has total assets of $20 million, with
stockholders’ equity of $15 million, an ROE of 17.3%, and a firm Beta of 1.6. If the risk free rate
of return is 4 and the market rate of return is 10, what is the cost of equity?
A) 19.6
B) 7.75
C) 13.6
D) 25.28
82) Thermacorp’s cost of equity is 13.6. If the after tax cost of debt is 4.6, what is the weighted
average cost of capital?
A) 15.85
B) 11.35
C) 11.2
D) 13.2
83) Thermacorp’s weighted average cost of capital is 11.35. If the average WACC in the heating
and cooling industry is 19, Thermacorp can be said to be earning
A) above normal economic performance.
B) above normal accounting performance.
C) below normal economic performance.
D) below normal accounting performance.
84) Thermacorp’s 17.3% ROE is an example of a(n) ________ ratio.
A) liquidity
B) profitability
C) activity
D) leverage
85) If the average ROE in the heating and cooling industry is 10.1%, and Thermacorp’s ROE is
17.3%, Thermacorp is said to have
A) below average accounting performance.
B) above average economic performance.
C) above average accounting performance.
D) below average economic performance.
86) Green Frog is an environmentally friendly firm in the cosmetics industry that has decided to
undertake a strategic planning project. It wants to ensure that it performs the process correctly
and so intends to start the process with the first step of the strategic planning process, which is
A) crafting a mission statement.
B) setting objectives.
C) measuring performance.
D) defining its business level strategy.
87) Green Frog is an environmentally friendly firm in the cosmetics industry. Even though Green
Frog is environmentally friendly, the strategic planning team had decided that financial
performance is one of the company’s top priorities. Which of the following is the best example of
an objective the company might use to help it achieve its goal of superior financial performance?
A) Increasing profitability.
B) Growing market share annually.
C) Improving product quality every quarter.
D) Growth in earnings per share averaging 15% or better annually for the next five years
88) Green Frog is an environmentally friendly firm in the cosmetics industry. If during the
strategic planning process Green Frog tried to determine the critical threats and opportunities in
its competitive environment, it would be performing a(n)
A) internal analysis.
B) external analysis.
C) WACC analysis.
D) economic analysis.
89) Green Frog is an environmentally friendly firm in the cosmetics industry. If Green Frog
undertook an analysis to help it understand which of its resources and capabilities are likely to be
sources of competitive advantage and which are less likely to sources of such advantages it
would be performing a(n)
A) internal analysis.
B) external analysis.
C) WACC analysis.
D) economic analysis.
90) Green Frog is an environmentally friendly firm in the cosmetics industry. If Green Frog were
considering expanding beyond the cosmetics industry into pharmaceuticals in order to gain
competitive advantages by operating in multiple markets and industries, this would be an
example of which type of strategy?
A) Business level strategy
B) Functional level strategy
C) Marketing strategy
D) Corporate level strategy
91) Define the term “strategy,” discuss the set of assumptions and hypotheses that a strategy is
based on and discuss what makes a good strategy.
92) Define the term “mission” and discuss how a firm’s mission can both positively and
negatively impact a firm’s performance.
93) What are objectives, what role do they play in the strategic management process and what
differentiates high quality objectives from low quality objectives?
94) Differentiate between business level and corporate level strategies and give examples of
each.
95) Define strategy implementation and discuss three specific organizational policies and
practices that are particularly important in implementing a strategy.
96) Discuss the nature of a sustainable competitive advantage. In your answer, identify when a
firm has a competitive advantage, define the term “economic value” and distinguish between a
temporary competitive advantage and a sustainable competitive advantage.
97) Identify two approaches to estimating a firm’s competitive advantages and discuss the
strengths and weaknesses of each.
98) Describe the difference between emergent and intended strategies. Why might firms employ
an emergent strategy?
99) Why is it important to understand a firm’s strategy, even if you are not a senior manager in a
firm?
100) What is the residual claimants view of equity holders?