Question 1

Economic profit is

Accepted Answer

A)  revenue - variable costs + fixed costs.
B)  revenue + variable costs - fixed costs.
C)  revenue - variable costs - fixed costs.
D)  revenue/cost of capital.E) B) and D)
F) C) and D)

Question 2

In 2006 Disney had

Accepted Answer

A)  a positive economic profit.
B)  accounting profits greater than the cost of capital.
C)  a negative economic profit.
D)  none of these choices.E) A) and B)
F) B) and D)

Question 3

The costs of labor and land used to produce a product is

Accepted Answer

A)  administrative costs.
B)  costs of goods sold.
C)  net profit plus the cost of capital.
D)  none of these choices.E) A) and B)
F) B) and C) B

Question 4

Abnormal net income is similar to economic profit.

Accepted Answer

A) True 
 B)False

Question 5

If the return on capital is equal to the cost of capital

Accepted Answer

A)  accounting profits are zero.
B)  economic profits are negative.
C)  accounting profit and economic profit are equal.
D)  economic profits are zero.E) None of the above
F) A) and B)

Question 6

The cost of capital and the cost of debt should be identical when economic profits are positive.

Accepted Answer

A) True 
 B)False

Question 7

An increase in revenue causes economic profit to rise.

Accepted Answer

A) True 
 B)False

Question 8

Stock prices change with surprises.

Accepted Answer

A) True 
 B)False

Question 9

Increases in revenue will

Accepted Answer

A)  increase economic profit
B)  decrease economic profit
C)  may or may not affect economic profit
D)  leave economic profit unchanged.E) C) and D)
F) A) and D)

Question 10

The equity premium is the return

Accepted Answer

A)  investors expect to equal a risk free investment.
B)  covered by stockholder insurance.
C)  on bonds.
D)  investors expect above a risk free investment.E) B) and C)
F) C) and D)

Question 11

The financial statement that shows how revenue is converted into the bottom line is called

Accepted Answer

A)  the sources and uses of funds statement.
B)  the Sarbanes report.
C)  the income statement.
D)  the balance sheet.E) A) and B)
F) A) and D)

Question 12

Entry continues as long as

Accepted Answer

A)  economic profits are zero.
B)  accounting profits are positive.
C)  accounting profits are positive and economic profits are negative.
D)  economic profits are positive.E) A) and D)
F) A) and C)

Question 13

To calculate the cost of capital

Accepted Answer

A)  it needs to know its economic profit.
B)  the firm must calculate the average weighted cost of debt.
C)  the firm needs to know how much debt it uses.
D)  the firm needs to know how much capital is has.E) None of the above
F) A) and C)

Question 14

The income statement indicates how revenue is transformed into net income.

Accepted Answer

A) True 
 B)False  True

Question 15

Economic profit equals NOPAY plus capital charges.

Accepted Answer

A) True 
 B)False

Question 16

Reducing direct costs will

Accepted Answer

A)  increase economic profit.
B)  decrease economic profit.
C)  leave economic profit unchanged.
D)  may or may not affect economic profit.E) C) and D)
F) A) and D)

Question 17

Economic profit equals

Accepted Answer

A)  accounting profit plus the cost of capital.
B)  accounting profit minus the cost of capital.
C)  accounting profit minus interest payments.
D)  accounting profit plus interest payments.E) A) and B)
F) None of the above B

Question 18

Entry into a competitive market will continue until

Accepted Answer

A)  economic profits are zero.
B)  normal profits are zero.
C)  when accounting losses are zero.
D)  a.and b.are trueE) All of the above
F) C) and D)

Question 19

The abnormal net income model defines the market value of a firm

Accepted Answer

A)  is its book value minus the present value of expected economic profits.
B)  is its book value plus the present value of expected economic profits.
C)  is its book value divided by the present value of expected economic profits.
D)  is its book value multiplied by the present value of expected economic profits.E) A) and C)
F) A) and B)

Question 20

When there is an excess of expected net income over the cost of capital

Accepted Answer

A)  abnormal net income is positive.
B)  accounting profits are negative.
C)  abnormal net income is negative.
D)  economic profits minus abnormal net income is negative.E) A) and B)
F) B) and C)

Exam 19: Measuring Economic Profit

Economic profit is

Correct AnswerverifiedShow Answer

In 2006 Disney had

Correct AnswerverifiedShow Answer

The costs of labor and land used to produce a product is

Correct AnswerverifiedB

Abnormal net income is similar to economic profit.

Correct AnswerverifiedShow Answer

If the return on capital is equal to the cost of capital

Correct AnswerverifiedShow Answer

The cost of capital and the cost of debt should be identical when economic profits are positive.

Correct AnswerverifiedShow Answer

An increase in revenue causes economic profit to rise.

Correct AnswerverifiedShow Answer

Stock prices change with surprises.

Correct AnswerverifiedShow Answer

Increases in revenue will

Correct AnswerverifiedShow Answer

The equity premium is the return

Correct AnswerverifiedShow Answer

The financial statement that shows how revenue is converted into the bottom line is called

Correct AnswerverifiedShow Answer

Entry continues as long as

Correct AnswerverifiedShow Answer

To calculate the cost of capital

Correct AnswerverifiedShow Answer

The income statement indicates how revenue is transformed into net income.

Correct AnswerverifiedTrue

Economic profit equals NOPAY plus capital charges.

Correct AnswerverifiedShow Answer

Reducing direct costs will

Correct AnswerverifiedShow Answer

Economic profit equals

Correct AnswerverifiedB

Entry into a competitive market will continue until

Correct AnswerverifiedShow Answer

The abnormal net income model defines the market value of a firm

Correct AnswerverifiedShow Answer

When there is an excess of expected net income over the cost of capital

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
B

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
True

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
B

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified