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Corporate Strategies - BOS Quiz 1
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Terms in this set (11)
What is a blue ocean strategy?
A company creates a new, uncontested market space that makes competitors irrelevant, creates new consumer value, and decreases costs - truly unique
What is a red ocean strategy?
Red oceans are all the industries in existence today - industries which evolve around competition and beating competitors at the same thing
What types of space are Blue Ocean's in?
Uncontested space where competitors do not already exist and you are innovative
What types of space are Red Ocean's in?
"Same space", space where competitors already exist and are in the same industries as you
Which strategy focuses on cost OR innovation?
Red Oceans focus on one or the other
Which strategy focuses on both cost AND innovation?
Blue Oceans focus on both cost and innovation
What is value innovation?
The cornerstone of blue ocean strategy - the region where a company's actions favorably affect both its cost structure and its value proposition to buyers
What is a strategy canvas? Why is it important?
A map of your company vs. the industry average in value curves
It shows your strongest and weakest points and areas which are truly important to increase value versus areas which can be neglected; divergence and uncontested space
What are the four analytical steps toward creating a new value curve?
1. Reduce
2. Eliminate
3. Raise
4. Create
What is the litmus test / 3 characteristics of a good blue ocean strategy?
1. Focus
2. Divergence
3. Tagline
What are the six pathways of reconstructing the market boundaries?
1. Look across alternative industries
2. Look across strategic groups within industries (a group of companies within an industry which pursue a similar strategy)
3. Look across the Chain of Buyers (purchasers, users, or influencer's)
4. Look across complementary product and service offerings (other products or services which affect their value)
5. Look across functional or emotional appeal to buyers
6. Look across time (what will this industry look like in 10 years?)
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Verified questions
QUESTION
The real risk-free rate is 2.05%. Inflation is expected to be 3.05% this year, 4.75% next year, and 2.3% thereafter. The maturity risk premium is estimated to be $0.05 \times(t-1) \%$, where t=number of years to maturity. What is the yield on a 7-year Treasury note?
QUESTION
The Neal Company wants to estimate next year’s return on equity (ROE) under different financial leverage ratios. Neal’s total capital is $14 million, it currently uses only common equity, it has no future plans to use preferred stock in its capital structure, and its federal-plus-state tax rate is 40%. The CFO has estimated next year’s EBIT for three possible states of the world:$4.2 million with a 0.2 probability, $2.8 million with a 0.5 probability, and$700,000 with a 0.3 probability. Calculate Neal’s expected ROE, standard deviation, and coefficient of variation for each of the following debt-to-capital ratios; then evaluate the results: $$ \begin{matrix} \text{Debt/Capital Ratio} & \text{Interest Rate}\\ \text{0\\%} & \text{--}\\ \text{10} & \text{9\\%}\\ \text{50} & \text{11}\\ \text{60} & \text{14}\\ \end{matrix} $$
QUESTION
You want to buy a house within 3 years, and you are currently saving for the down payment. You plan to save $9,000 at the end of the first year, and you anticipate that your annual savings will increase by 5% annually thereafter. Your expected annual return is 8%. How much will you have for a down payment at the end of Year 3?
QUESTION
Your division is considering two projects. Its WACC is 10%, and the projects’ after-tax cash flows (in millions of dollars) would be as follows: $$ \begin{matrix} \text{ } & \text{0} & \text{1} & \text{2} & \text{3} & \text{4}\\ \text{Project A} & \text{- \$ 30} & \text{\$ 5} & \text{\$ 10} & \text{\$ 15} & \text{\$ 20}\\ \text{Project B} & \text{- \$ 30} & \text{\$ 20} & \text{\$ 10} & \text{\$ 8} & \text{\$ 6}\\ \end{matrix} $$ a. Calculate the projects’ NPVs, IRRs, MIRRs, regular paybacks, and discounted paybacks. b. If the two projects are independent, which project(s) should be chosen? c. If the two projects are mutually exclusive and the WACC is 10%, which project(s) should be chosen? d. Plot NPV profiles for the two projects. Identify the projects’ IRRs on the graph. e. If the WACC was 5%, would this change your recommendation if the projects were mutually exclusive? If the WACC was 15%, would this change your recommendation? Explain your answers. f. The crossover rate is 13.5252%. Explain what this rate is and how it affects the choice between mutually exclusive projects. g. Is it possible for conflicts to exist between the NPV and the IRR when independent projects are being evaluated? Explain your answer. h. Now look at the regular and discounted paybacks. Which project looks better when judged by the paybacks? i. If the payback was the only method a firm used to accept or reject projects, what payback should it choose as the cutoff point, that is, reject projects if their paybacks are not below the chosen cutoff? Is your selected cutoff based on some economic criteria, or is it more or less arbitrary? Are the cutoff criteria equally arbitrary when firms use the NPV and/or the IRR as the criteria? Explain. j. Define the MIRR. What’s the difference between the IRR and the MIRR, and which generally gives a better idea of the rate of return on the investment in a project? Explain. k. Why do most academics and financial executives regard the NPV as being the single best criterion and better than the IRR? Why do companies still calculate IRRs?