TESTBANK: CHAPTER 2
Goals, Values and Performance
True/False Questions
1. The entrepreneurs who create business enterprises are motivated primarily by the desire for personal
wealth.
[See p. 37]
2. “Value” refers to the estimated monetary worth of a product or asset.
[See p.37]
3. A firm’s Value Added is the difference between the value of its outputs and the costs of the inputs
purchased by the firm to provide these outputs.
[See p.38]
4. For a firm to pursue stakeholder interests rather than shareholder interests requires that it maximizes
value for all stakeholders rather than maximizes value for shareholders alone. The tools of stakeholder
analysis mean that this is not a major problem for management.
[See p.39]
5. Because profit is defined by accounting rules and measured in financial statements, profit
maximization is an unambiguous performance goal for a firm.
[See p.40]
6. Economic profit is a better indicator of a firm’s performance than accounting profit because
economic profit takes into account the normal expected return to capital.
[See pp.40-41]
7. Firms are often constrained from pursing goals other than profit maximization by the pressure of
competition and threat of acquisition.
[See p.39]
8. Maximizing profit over the life of the firm bears no relationship to the goal of maximizing
shareholder value.
[See pp. 42-43]
9. In practice, pursuing stakeholder interests and pursuing shareholder interests are identical since in
order to make profits a firm must satisfy all its stakeholders.
[See p.39]
10. Basing management decisions on economic profit (e.g. Economic Value Added) rather than
accounting profit is more important for companies with few fixed assets (such as software companies
and consulting firms) than capital-intensive companies such as chemical companies and vehicle
manufacturers.
[See p.41]
11. Stock market capitalization offers the best available indicator of the net present value of a firm’s
future free cash flows.
[See pp.42-43]
12. Estimating a firm’s future cash flows is a fairly straightforward task.
[See pp.43-44]
13. To assess the profitability of a company it is usually better to use profitability ratios based upon
balance sheet items (such as return on equity or return on capital employed) than portability ratios
based upon sales (such as operating margin or net margin).
[See Table 2.3, p. 45]
14. Disaggregating return on capital employed into sales margin and capital turnover offers a useful
stating point for diagnosing firm performance.
[See pp.45-46]
15. Since the long term is a series of short terms, short term profit maximization will always lead to
long term profit maximization.
[See pp.48-49]
16. The main difficulty of selecting performance targets for a firm is that performance goals tend to be
long term, but effective monitoring must be short term.
[See p.49]
17. The balanced scorecard is primarily a tool for implementing the stakeholder view of the firm.
[See p.48]
18. If a firm is to achieve superior profit performance, it is essential that profitability targets are set for
managers. If managers focus on the drivers of profitability rather than profitability itself, their efforts
will be diffused.
[See pp.49-51]
19. Adam Smith’s notion of the “invisible hand” refers to the ability of the price mechanism to align
the interests of individuals with those of society—by pursuing their own interests self-interested
individuals also further the overall good of society.
[See p.51]
20. According to Milton Friedman, the social purpose of a business is to make profit.
[See p.51]
21. Empirical research shows that firms that are committed to values and ethical principles are
significantly less profitable over the long run than those committed to the pursuit of profit.
[See p.53]
22. Michael Porter and Mark Kramer’s concept of shared value is based upon the notion that business
enterprises should focus, first, on creating value and, second, on distributing that value among different
participants (including shareholders and society-at-large).
[See p.54]
23. One implication of real option analysis is that when pursuing a new strategic initiative, there is
value in a firm making an irreversible commitment to continuing that initiative.
[See p.56]
24. A “phases and gates” approach to new product development is an example of a business process
designed to create option value.
[See p.56]
25. Real options are an important tool for thinking about strategic decisions under uncertainty,
however, quantitative techniques designed to value financial options (e.g. the Black-Scholes option
pricing model) cannot be applied to real options.
[See p.57]
Multiple Choice Questions
26. Every business enterprise has a distinct purpose; however, common to all businesses is the goal of:
[See p.37]
27. For the purposes of strategy analysis, it is convenient to view business strategy is primarily a quest
for:
[See p.39]
28. A major impediment to the stakeholder view of the firm is:
[See p.39]
29. For a value for the firm requires that a firm:
[See p.37]
30. The firms create value through production—transforming less valuable inputs into more valuable
outputs—and also through:
[See p.37]
31. Value added can be defined as:
[See p.38]
32. Although firms may pursue a variety of goals, the assumption that primary goal of strategy is to
maximize profits over the long term may be justified by:
[See p.39]
33. The principal difference between accounting profit and economic profit is:
[See p.40]
34. The divergence between accounting profit and economic profit is likely to:
[See p.41]
35. Profit and value of the firm are two concepts which are:
[See pp.41-42]
36. The main difference between accounting measures of firm performance and stock-market measures
of firm performance is:
[See pp.43-44]
37. Maximizing enterprise value and maximizing shareholder value are closely linked because:
[See p.40]
38. To assess the adequacy of the return on capital employed (ROCE) that a firm earned in its most
recent financial year, which of the following would not be an appropriate benchmark:
[See pp.44-45]
39. To assess whether or not a firm is earning an adequate rate of profit, return on capital employed
(ROCE) is a better indicator than return on sales because:
[See p.45]
40. To diagnose the sources of a firm’s poor financial performance, it is useful to:
[See pp.45-46]
41. In using accounting ratios to appraise a firm’s performance, it is helpful to use:
[See pp.42–43]
42. In appraising a firm’s profit performance:
[See pp.41–42]
43. The biggest problem in designing a performance management system arises as a result of:
[See pp.45–46]
44. The Balanced Scorecard is a technique of performance management that establishes and monitors
four dimensions of performance:
[See p.49]
45. The main problem of a company establishing shareholder value creation as its primary performance
goal is:
[See pp.49-51]
46. Influential scholars such as Milton Friedman, Charles Handy, Michael Porter and CK Prahalad:
[See p.49]
47. Michael Porter and Mark Kramer’s notion of “shared value” reconceptualises CSR (corporate
social responsibility) by emphasizing:
[See p.50]
48. Which of the following activities by Starbucks Inc. is least likely to be an example of Michael
Porter and Mark Kramer’s “shared value creation”?
[See p.54]
49. In new product development, a “phases and gates” approach means that:
[See p.56]
50. Viewing strategy as a portfolio of options rather than a portfolio of investments relies upon the
rationale that:
[See pp.55-56]
51. The value of a real option can be calculated using:
[See p.56]
52. The two main categories of real options are growth options and flexibility options. Which of the
following investments is not a growth option?
[See pp.56-57]