Cost Management

Business

Quiz 20 :

Management Compensation, Business Analysis, and Business

Quiz 20 :

Management Compensation, Business Analysis, and Business

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Jamison Auto Parts produces replacement parts for automobiles. Last year Jamison had EVA ® net income of $200,000, cost of capital of 10 percent, and EVA® capital of $750,000. Determine the firm's economic value added.
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Economic value added (EVA)
It is basically a business unit income after taxes and also after deducting the cost of capital. Economic value added (EVA) is an estimate of firm economic profit and it is also company's financial performance which is based on the wealth of the company after deducting the cost of capital from the operating profit of the firm. The concept of EVA is used during 1990's by Stern Stewart, a New York based consulting firm.
Here, EVA net income is given $200,000 and the cost of capital is 10% while EVA capital invested is $750,000. So, Firm's EVA is calculated by subtracted the multiplication of cost of capital and the EVA capital invested from the EVA net income
img Hence, Firm's EVA is
img Here, EVA of the firm is $125,000 it is important on the ground that EVA indicates the profitability of the firm and also it is reflection of the performance of the management. As more the EVA of the firm, more will be good sign for the company which shows that organization is performing well and management decision is positive.

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Explain the different business valuation methods. Which do you think is superior and why
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Business valuation method
It is well known that from time to time valuation of the business is must be taken, so that decision are to be measured in terms of the efficiency. Valuation of the business is not only help to the owner of the business but also it will benefit to the investor. Investor takes decision according to the business success rate and their valuation whether it is fruitful for them to invest or not in that particular business. There are various methods applied in order to measure the valuation of the businesses.
There are various approaches to value the business which is book value method, market value method, discounted cash flow method, and the multiplies based method.
Book value method:
Under this method businesses is valued from the balance sheet as this method is simple, clear, and accessible but one of the major drawback is that under which market value is totally ignored.
Market value method:
As per this method current market value of the firm is to be valued by taking current firm's common equity value. Under this all the equity shareholder are considered but not preferred stock. Firm's market value is determined by multiplying current share price into the number of share outstanding. This market value provide clear picture of equity at the market and which indicates the current value of the company. It is known as firm's market capitalization.
Market value of the share indicates the value of company as if share value increase value of the firm also goes up, and if the value decline of the share it clearly indicates that there is something wrong and the management must take comprehensive action to increase the share value by providing good quality in the product at the least cost and also satisfied the customer at any cost to boost the sale of the product.
Discounted cash flow method:
This is also one of the method used for the valuation of the business. Basically, the value of the firm depends upon the value of the debt and the value of the equity, if we add value of the debt to the value of the equity we get value of the firm. Under the discounted cash flow method (DCF) attempt is made to value the investment today and by prediction what is the value of the investment tomorrow or future. It means future cash flow is predicted, by this investor make a plan for the future to make some changes in the businesses.
Under this if the discounted cash flow (DCF) is above the current cost of the investment, then the opportunity for the return is seems to be positive. But there is some limitation on this concept that sometimes prediction may be wrong.
Multiplies based method:
Earning multiplier method is also known as price to earnings ratio in which there is comparison of current market price of a share to the earning per share of the company. While the value of the firm is the multiplication of the earning multiplier to the earning, it is a fast tool in the hands of the investor to determine the potential earning of the company without getting the details of the accounting report. But there is a limitation of the multiplier earning concept.
More the earning multiplier more will be the value of the firm as value of the firm is depends upon the earning multiplier and the earning of the company. It is an easy and readily method which is used in order to determine the value of the firm as per the earning multiplier. The concept of earning multiplier is same as price to earnings ratio concept that is P/E ratio. Under this concept future earnings should be taken on the discounting value and which help to find the company's value.
Conclusion:
As per the analysis all methods of valuation of the business have some positive or negative points on the ground that some are good for the small or some are useful for the large business. But out of which discounted cash flow method is seems to be superior as it predict for the future also and help to the owner and the investor to think for the investment decision. Under this comparison is possible, prediction for the future is possible. So that investor can make a plan accordingly for the future.

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What are the two types of bonus pools for bonus incentive plans How do they differ, and how does each achieve or not achieve the three objectives of management compensation
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Business analysis Valuation and Management Compensation.
Analysing the firm's future value is a critical task as prediction is depend on the future economic benefit can be generated. Firms value is important as many decisions are depend on firms computed value as it defines perception towards firm.Compensation to business manager is a important and critical task, as effective retaining of the them is essential for firm's success. Compensation involves salary, bonus, and benefits.
Discussion and analysis:
Bonus payment is categorised in two types namely unit based i.e. based on individual performance firm-wide i.e. based on overall performance of the firm.
List below are the advantage disadvantage of such bonus:
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What type of management compensation is the fastest growing part of total compensation Why do you think this is the case
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Why do you think it is important for a management accountant to be able to complete an evaluation of the firm separate from an evaluation of individual managers
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Develop arguments to support your view as to whether executive pay in the United States is too high.
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Sticky Fingers Inc. produces scotch tape and masking tape. Last year's annual report has been compiled, and you are in charge of business analysis for the year. The company had a goal for inventory turnover of 6, cost of goods sold of $400,000, beginning inventory of $50,000, and ending inventory of $70,000. What was the actual inventory turnover, and at what percent did the firm achieve its goal
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Explain how a manager's risk aversion can affect decision making and how compensation plans should be designed to deal with risk aversion.
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From a financial reporting standpoint, what form of compensation is most desirable for the firm
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Moore Heel is a shoe manufacturing company. Moore has hired you to value the company based on the discounted cash flow method. You have determined that the present value of the company's cash flows is $400,000, marketable securities total $150,000, and the market value of debt is $250,000. What is the value of the firm
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From a tax-planning standpoint, what form of compensation is least desirable for the manager For the firm
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Identify and explain the six financial ratios used to evaluate liquidity as part of the firm's business analysis.
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List the four types of bonus payment options and explain how they differ. How does each achieve or not achieve the three objectives of management compensation
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List the three bases for bonus incentive plans; explain how they differ and how each achieves or does not achieve the three objectives of management compensation.
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Tinsley Inc. is an industry-leading cardboard manufacturer. You have been asked to determine a market value for the firm's equity. The firm has 100,000 shares outstanding, earnings per share of $2.50 last year, and a stock price of $25. What is the market value
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Identify and explain the three objectives of management compensation.
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Smith Co. is a firm specializing in financial advice for retired individuals. After some analysis, you have determined that an earnings multiplier of 7 is appropriate for this type of business. Smith's most recent earnings totaled $250,000. What is the value of the firm based on the earnings multiplier
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Explain the three types of management compensation.
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Explain how management compensation can provide an incentive to unethical behavior. What methods can be used to reduce the chance of unethical activities resulting from compensation plans
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How does the firm's management compensation plan change over the life cycle of the firm's products
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