Q&A Hero

Q: Managers should hedge cash flow risk whenever possible.

Q: Since diversifiable risks are not priced into the cost of capital, executives can ignore such risks.

Q: Diversifiable or firm-specific risks, such as the ability to retain talented management and rising input costs, affect a company’s cost of capital.

Q: Investors demand returns for nondiversifiable risks only.

Q: Risk enters valuation both through a company’s cost of capital and through its cash flows.

Q: A company cannot create value through sale-leaseback transactions.

Q: The primary way that financial engineering can create value is by lowering firm taxes.

Q: Financial engineering includes the use of derivatives, structured debt, securitization, and off–balance-sheet financing. In some cases financial engineering can create value.

Q: Multiple expansion is one way that firms can create value through acquisitions.

Q: Because interest expense is tax deductible, share repurchases can have the beneficial effect of increasing earnings per share, which will definitely lead to a share price increase.

Q: If one uses free cash flows to value a firm, then value may be created through a lower cost of capital.

Q: There are no exceptions to the principle of conservation of value.

Q: The conservation of value principle states that anything that does not increase cash flows does not increase value.

Q: Explain how the current level of return on invested capital (ROIC) should influence managers’ decision concerning their focus on the two sources of value creation.

Q: For a given company, next year’s NOPLAT is $200. For the foreseeable future, the growth rate will be 5 percent, the ROIC will be 10 percent, and the WACC will be 8 percent. Using the key driver formula, calculate the value of the company. a) $2,500 b) $4,000 c) $6,667 d) $3,333

Q: For a given company, next year’s NOPLAT is $50. For the foreseeable future, the growth rate will be 3 percent, the ROIC will be 12 percent, and the weighted average cost of capital (WACC) will be 10 percent. Using the key driver formula, calculate the value of the company. a) $536 b) $1,667 c) $714 d) $500

Q: A company with an ROIC of 45 percent and a cost of capital of 8 percent is considering an investment opportunity of similar risk to its existing investments. If the new opportunity would generate a 30 percent ROIC, what should the company do? a) The company should invest in this project, as 30 percent is pretty close to the 45 percent that the company currently achieves. b) The company should not invest in the project, since the return is lower than its current return of 45 percent. c) The company should invest in the project, as its return is greater than the cost of capital. d) The company should not invest in the project, since it already enjoys a high ROIC and the new investment will dilute the overall returns.

Q: Companies can generally create more value by competing to lure customers away from rivals than by expanding their portfolios by either developing new products or expanding the market.

Q: If the growth rate of a company is 5 percent and the investment rate is 40 percent, what is the ROIC? a) 800 percent. b) 8 percent. c) 2 percent. d) 12.5 percent.

Q: If the growth rate of a company is 2.1 percent and the ROIC is 9 percent, what is the investment rate? a) 23 percent. b) 30.4 percent. c) 45.5 percent. d) 69.6 percent.

Q: Since value is based on discounted cash flows, a company or an investor need not analyze growth and return on invested capital (ROIC).

Q: Explain the challenge competition plays in creating value in the long run and what this means for the firm that wishes to create value in the long run.

Q: The faster companies can increase their revenues and deploy more capital at attractive rates of return, the more value they create.

Q: Which of the following was most responsible for the Internet boom and bust? a) The Y2K bug. b) Increased foreign competition. c) A misapplication of the principle of leverage. d) A single-minded focus on growth at any cost.

Q: Paying attention to which of the following tends to lead to a company doing well in the stock market? I. Growth. II. Price-to-earnings ratio. III. Earnings per share. IV. Return on invested capital. a) I and II only. b) II and III only. c) I and IV only. d) II, III, and IV only.

Q: Data from Europe and the United States found that the correlation between value creation and employment in the company has been: a) Positive. b) Negative. c) Essentially zero.

Q: Under which condition will a fast-growing firm create value? a) It will create value in any circumstance. b) If the return on invested capital (ROIC) is greater than the cost of obtaining funds. c) If the return on invested capital (ROIC) is less than the cost of obtaining funds. d) If the firm increases market share.

Q: Which of the following were fundamental flaws in the decisions made by participants in the securitized mortgage market that contributed to its boom through 2007? I. Leverage creates value. II. Lower costs create value. III. Diversification creates value. IV. Lower cost of capital creates value. a) I and II only. b) I and III only. c) II and III only. d) III and IV only.

Q: The conservation of value corollary of the value-creation principle says that: a) Reducing costs is the first step in creating value. b) Return on invested capital must increase over time to create value. c) Anything that does not increase cash flows does not create value. d) Acquisitions always create more value than divestitures.

Q: Which of the following have been found to occur in companies that adopt long-term value-creation policies? I. Higher customer satisfaction. II. Higher number of acquisitions. III. Better treatment of former employees. IV. A higher level of corporate responsibility. a) I and II only. b) I, III, and IV only. c) II and III only. d) III and IV only.

Q: Which one of the following actions would help a company create long-term value? a) Focus on keeping costs at a minimum. b) Find the optimal debt-to-equity ratio. c) Seek and exploit new sources of competitive advantage. d) Monitor and follow macroeconomic trends.

Q: Chapter: Chapter 01: Why Value Value?

Q: The alternative continuing-value measure CVt = (NOPLATt+1)/WACC depends on the assumption that: a) Excess profits will be competed away. b) WACC is greater than the inflation rate. c) NOPLATt+1 represents a value from the peak of the business cycle. d) NOPLATt+1 represents a value from the trough of the business cycle.

Q: What constitutes effective managerial leadership in achieving superior strategy execution?

Q: Identify three actions that are key elements of leading the strategy execution process.

Q: Give two examples of "symbolic" culture-changing actions and two examples of "substantive" culture-changing actions.

Q: Identify and briefly discuss four steps that managers can take to change a culture that is out of step with the company's strategy.

Q: What are the characteristics of unhealthy cultures?

Q: Give at least three nonmonetary examples of motivation and rewards practices that have the capability to foster good strategy execution and explain how they act to produce such a result.

Q: Identify at least four guidelines for creating incentive compensation systems that link employee behavior to organizational objectives.

Q: Identify types of support systems that a company can install to support the execution of its strategy.

Q: What three principles underlie the statistical thinking of Six Sigma quality control programs?

Q: What is the value of striving for continuous improvement in internal processes? How does TQM differ from business process reengineering?

Q: Identify and describe two ways that policies and procedures aid the task of implementing and executing strategy?

Q: Why does a company's budget need to be closely linked to the needs of good strategy execution? Why might a change in strategy call for budget reallocations?

Q: What is meant by empowerment of employees? How does it differ from delegation of authority? In what ways can empowerment of employees aid the cause of good strategy execution?

Q: A decentralized organization structure is more likely to further the cause of good strategy execution than is a centralized organization structure. True or false? Justify your answer.

Q: Explain the difference between a centralized and a decentralized organization structure. Which one is more likely to further the cause of good strategy execution? Why?

Q: Identify four tactics that are common among companies dedicated to staffing jobs with the best people they can find.

Q: What are the eight components of strategy execution?

Q: Successfully leading the effort to foster a results-oriented, high-performance culture generally requires simple leadership practices, such as A. treating employees with dignity and respect. B. encouraging employees to use initiatives and creativity in performing their work to continually make changes to operating practices. C. setting strain objectives to push the envelope on sales efforts. D. focusing attention on motivational techniques that instill self-interest, which is the cornerstone of the free-enterprise system. E. celebrating management's success with high incentives and loyalty trips.

Q: Successfully leading the effort to instill a spirit of high achievement into a company's culture and put constructive pressure on the organization to achieve good results A. entails such actions as treating employees with dignity and respect, celebrating individual, group, and company successes, and setting stretch objectives. B. hinges on the extent to which top management emphasizes a positive rather than a negative reward system. C. requires that top executives make operating excellence the company's only core value. D. calls for top executives to stress the adoption of best practices, push for continuous product innovation, and provide employees with a stream of suggestions for improving company operations. E. hinges on the degree to which lower-level managers and supervisors are good practitioners of MBWA.

Q: Putting constructive pressure on the organization to achieve good results and operating excellence entails A. setting stretch objectives and creating an expectation that company personnel are to do their best in achieving performance targets. B. utilizing the full range of motivational techniques and compensation incentives to reward high performance. C. treating employees with dignity and respect. D. encouraging employees to use initiative and creativity in performing their work. E. All of these.

Q: The purpose of managing by walking around is to A. learn more about company operations and see how activities are really being done. B. gather information about what is happening from people at different organizational levels and learn firsthand how well the strategy execution process is proceeding. C. give employees a chance to make suggestions for improvement. D. gather information about what strategy to follow and to learn what competitors are doing. E. be visible and accessible to employees.

Q: MBWA refers to A. modifying businesses with action. B. a mission, balanced scorecard, and weighted assessment. C. the managerial practice of making regular visits to field operations and talking with many people at many different levels. D. the balanced scorecard perspectives of a company's strategy map. E. managing businesses with authority.

Q: Which of the following is most integral to the task of leading the drive for good strategy execution and operating excellence? A. Pushing lower-level managers and supervisors to practice MBWA B. Being a good motivator and a decisive decision maker C. Making sure the company has a good strategic plan, staying on top of how well things are going, pushing organization units to achieve good results, pushing for corrective actions to improve both the company's strategy and how well it is being executed, and displaying ethical integrity and leading social responsibility initiatives D. Practicing enlightened empowerment of employees and using a decentralized approach to decision making E. Being good at designing a strategy-supportive reward structure

Q: Proficient strategy execution requires executive managers to A. be current with events and closely monitor progress, put constructive pressure on the organization for operating excellence, and initiate corrective action when necessary to improve performance and achieve desired results. B. understand all the tasks required to implement the strategy so as to ensure staff will not shortchange any strategic-critical activity. C. attach great importance to gathering statistics that define every task effort and ensure limited variability. D. initiate a problem-solving search to ensure obstacles to success are identified. E. All of these.

Q: Leading the strategy execution process requires A. senior managers to be out in the field, seeing for themselves how well operations are going. B. company managers to be diligent and adept in ferreting out problems and issues. C. managers to push for better results when the strategy execution effort is not going well. D. managers to have good business judgment in deciding what actions to take when corrective actions are necessary. E. All of these.

Q: Symbolic culture-changing actions are best represented by A. those actions top executives take to lead by example. B. frugality if a low-cost strategy is being executed. C. ensuring all management actions are "walking the talk." D. ceremonial events to celebrate actions that exemplify the performance culture. E. All of these.

Q: Which one of the following is not a substantive culture-changing action that a company's managers can undertake to alter a problem culture? A. Promoting individuals who have stepped forward to advocate the shift to a different culture and who can serve as role models for the desired cultural behavior B. Revising policies and procedures in ways that will help drive cultural change C. Screening all candidates for new positions carefully, hiring only those who appear to fit in with the new culture D. Urging company personnel to search outside the company for work practices and operating approaches that may be an improvement over what the company is presently doing E. Designing compensation incentives that boost the pay of teams and individuals who display the desired cultural behaviors and hit change-resisters in the pocketbook

Q: Which one of the following is a substantive culture-changing action that a company's managers can undertake to alter a problem culture? A. Identifying aspects of the present culture that pose problems B. Revising policies and procedures in ways that will help drive cultural change and replacing senior executives who may be stonewalling needed organizational and cultural changes C. Empowering employees to adopt whatever new work practices they believe will be an improvement D. Making a concerted effort to turn the company's core competencies into distinctive competencies E. Shifting from decentralized to centralized decision making so as to give senior executives more authority and control in driving cultural change

Q: When trying to change a problem culture, management should undertake such steps as A. selecting a team of key employees to lead the culture change effort and design a plan for cultural change. B. identifying which aspects of the present culture are supportive of good strategy execution and which ones are not. C. drawing up an action plan to change the present culture and then persuading company personnel why this plan of action is good and will be successful. D. conducting an employee survey to determine the organization's cultural norms and what company personnel like and dislike about the current culture. E. employing a consultant with expertise in culture change and following his/her advice on how to proceed.

Q: In moving to alter a problem culture, management should A. identify which aspects of the present culture are supportive of good strategy execution and which ones are not. B. specify what new actions, behaviors, and work practices should be prominent in the "new" culture. C. talk openly about the problems of the present culture and how new behaviors will improve performance. D. employ visible, forceful actionsboth substantive and symbolicto ingrain a new set of behaviors, practices, and cultural norms. E. All of these.

Q: The place for management to begin in trying to change a problem culture is A. by selling company personnel on the need for a new set of behaviors and work practices. B. by spending heavily on programs to train employees in the ways and beliefs of the new culture to be implanted. C. to visibly praise and reward people who exhibit traits and behaviors that undermine the existing culture. D. writing a new values statement and describing in highly motivating terms the kind of culture that is needed. E. to institute incentive compensation programs that generously reward employees for adopting best practices.

Q: Changing a problem culture A. is one of the toughest managerial tasks because of the tendency of company personnel to cling to familiar practices and ways of doing things. B. is best done by instituting an aggressive program to train employees in the ways and beliefs of the new culture to be implanted. C. is best done by selecting a team of key employees to lead the culture change effort. D. requires writing a new statement of core values and describing in writing the kind of culture that is needed. E. can be done quickly only if managers tie incentive compensation to exhibiting the desired new cultural behaviors and if managers visibly praise people who exhibit the desired new cultural traits.

Q: The single most visible factor that distinguishes successful culture-change efforts from failed attempts is A. forceful management actions to empower employees to adopt new operating practices. B. competent leadership at the top. C. de-layering the management hierarchy. D. developing a new values statement that inspires company personnel to put forth their best efforts to achieve performance targets. E. convincing employees that top management is genuinely committed to high ethical standards and the exercise of corporate social responsibility.

Q: Companies with insular, inwardly focused cultures usually A. tend to possess arrogant overconfident mind-sets, thereby tending to underestimate the competencies and accomplishments of rival companies and overestimate their own progress. B. tend to concentrate on benchmarking to find out the best methods of doing things. C. tend to concentrate greed and ego-gratification. D. tend to discount and doubt their own performance statistics. E. All of these

Q: Companies with change-resistant cultures A. are typically opposed to performance-based incentive compensation and employee empowerment. B. are prone to be preoccupied with avoiding risks, are unlikely to pursue bold actions to capture emerging opportunities, have a widespread aversion to continuous improvement in performing value chain activities, and prefer following rather than leading market change. C. are often overly gung-ho about looking outside the company for best practices, new managerial approaches, and innovative ideas. D. tend to be preoccupied with making sure the company has a safe, follow-the-industry-leader type of strategic vision and it avoids risky business strategies. E. are typically run by amoral managers who have little regard for high ethical standards.

Q: Companies with politicized cultures A. are typically opposed to performance-based incentive compensation and employee empowerment. B. tend to be preoccupied with making sure the company has a safe, follow-the-industry-leader type of strategic vision and it avoids risky business strategies. C. tend to drive managers to consume a great deal of organizational energy and make the company's strategic agenda take a backseat role to political maneuvering. D. are typically opposed to sound strategic initiatives designed to promote the well-being of specific functions. E. are typically run by political managers who have little regard for high ethical standards.

Q: Unhealthy company cultures typically have such characteristics as A. tight budget controls, overly strict enforcement of longstanding policies and procedures, and low ethical standards. B. a preference for conservative strategies, an aversion to incentive compensation, and excessive emphasis on profitability. C. a politicized internal environment, hostility to change, an insular, inwardly focused culture, and unethical or greed-driven behavior on the part of executives. D. overemphasis on employee empowerment, a complacent approach to building competencies and capabilities, no coherent business philosophy, and excessively bureaucratic policies and procedures. E. too little emphasis on innovation, a strong preference for hiring managers from outside the company, very few core values and traditions, and a weakly enforced code of ethics.

Q: Which of the following is not an example of an unhealthy company culture? A. Insular inwardly focused cultures B. Change-resistant cultures C. Unethical and greed-driven cultures D. Politicized cultures E. Hyper-adaptive cultures

Q: Which of the following is not a common trait of an unhealthy company culture? A. A politicized internal environment B. Hostility to change and a wariness of people who champion new ways of doing things C. An aversion to looking outside the company for best practices, new managerial approaches, and innovative ideas D. An aversion to incentive compensation, failure to recruit the best and brightest employees, subpar support for employee training, overemphasis on working in teams, and low ethical standards E. A disregard for high ethical standards and an overzealous pursuit of wealth and status on the part of key executives

Q: Which of the following statements about adaptive corporate cultures is false? A. The hallmark of adaptive corporate cultures is willingness on the part of organizational members to accept change and take on the challenge of introducing and executing new strategies. B. The standout cultural traits are a "can-do" spirit, pride in doing things right, no-excuses accountability, and a pervasive results-oriented work climate where people go the extra mile to meet or beat stretch objectives. C. Change is willingly embraced by management and nonmanagerial employees. D. Adaptive cultures are exceptionally well suited to companies with fast-changing strategies and market environments. E. For an adaptive culture to remain intact over time, top management must orchestrate organizational changes in a manner that (1) does not compromise core values and long-standing business principles and (2) tries to satisfy all their legitimate interests simultaneously.

Q: The hallmark of an adaptive corporate culture is A. a shared willingness to adapt core values to fit the changing requirements of an evolving strategy. B. a conservative strategy, prudent risk taking, and strong peer pressures to observe cultural norms. C. willingness on the part of organizational members to accept change and take on the challenge of introducing and executing new strategies. D. a commitment to the types of core values and ethical standards that make a company a great place to work. E. a strong preference for performance-based compensation systems, especially the payment of bonuses and stock options.

Q: Which one of the following statements about a high-performance culture is false? A. High-performance cultures are characterized by a pride in doing things right and a no-excuses sense of accountability. B. High-performance cultures often have a low regard for high ethical standards, a strong preference for high-risk strategies, and a slow and methodical approach to responding to changes in the marketplace. C. The challenge in creating a high-performance culture is to inspire high loyalty and dedication on the part of employees, such that they are energized to do things right. D. In a high-performance culture, there's a razor sharp focus on what needs to be done. E. In high-performance cultures, there's a strong sense of involvement on the part of company personnel and emphasis on individual initiative and creativity.

Q: The hallmarks of a high-performance corporate culture include A. frequently revised and updated values and ethics statements, a deep commitment to employee training, and unusually attractive fringe benefit packages for company personnel. B. a "can-do" spirit, pride in doing things right, no-excuses accountability, and a pervasive results-oriented work climate where people go the extra mile to meet or beat stretch objectives. C. a balanced scorecard approach to measuring performance, strong emphasis on teamwork, strict enforcement of company policies and procedures, and incentive compensation for all employees. D. a deep commitment to pioneering new best practices, a preference for being a fast follower as opposed to a first mover or late mover (because the risks are more acceptable), and across-the-board bonuses for all personnel when the company meets or beats stretch objectives. E. a deep commitment to top-notch quality and superior customer service, dedicated use of TQM and/or Six Sigma quality control programs, and the payment of big performance bonuses and stock options.

Q: Which one of the following is not a fundamental part of a company's culture? A. The work practices and behaviors that define "how we do things around here" B. The "chemistry" that permeates its work environment C. The company's core values and business principles D. The company's strategic vision, strategic intent, and strategy E. The style of operating and ingrained behaviors and attitudes

Q: The character of a company's corporate culture is a product of A. the company's core values and business principles. B. its style of operating and ingrained behaviors and attitudes. C. the "chemistry" that permeates its work environment. D. the work practices and behaviors that define "how we do things around here." E. All of these.

Q: A company's corporate culture is best defined and identified by A. the strategy and business model that a company has adopted. B. the character of a company's internal work climateas shaped by the company's core values, beliefs, and business principles. C. its statement of core values and its code of ethics. D. its internal politics. E. the traditions that company executives are committed to maintaining.

Q: Some of the most important nonmonetary approaches to enhancing motivation and helping drive successful strategy execution include A. adopting promotion from within policies and acting on suggestions from employees. B. providing attractive perks and fringe benefits. C. creating a work atmosphere in which there is genuine sincerity, caring, and mutual respect among employees and management. D. using frequent words of praise to recognize employees for commendable performance. E. All of these.