Question 1

Assume the Apple division of the Gala Company had the following results last year (in thousands). Managements required rate of return is 10% and the weighted average cost of capital is 8%. Its effective tax rate is 30%.
$$\begin{array} { | l | r | } 
\hline \text { Sales } & \$ 3,000,000 \
\hline \text { Operating income } & \$ 500,000 \
\hline \text { Total assets } & \$ 4,500,000 \
\hline \text { Current liabilities } & \$ 300,000 \
\hline
\end{array}$$ What is Apple division's economic value added?

Accepted Answer

The answer of Assume the Apple division of the Gala...

Question 2

Which of the following statements pertaining to residual income is correct?

Accepted Answer

Residual income is calculated by subtracting the cost of capital (the target rate of return multiplied by the investment) from the operating income. Therefore, if the target rate of return increases, the cost of capital increases, which, all else being equal, would decrease residual income.

Question 3

Which of the following will not change a company's return on investment?

Accepted Answer

Return on Investment (ROI) is calculated as Net Income divided by the total investment (or assets) of the company. It measures how effectively a company is using its invested capital to generate profits. An increase in the company's required rate of return (C) does not directly affect the calculation of ROI, as it is more about the expectations of investors rather than a change in the actual performance or asset base of the company.

Question 4

Which of the following will not result in an increase in both return on investment and residual
Income?

Accepted Answer

A decrease in the minimum required rate of return will increase residual income but not necessarily affect the return on investment, as ROI is calculated based on actual returns, not the required rate.

Question 5

Diamond Company has provided the following information:
Total assets: $100,000
Profit margin: 20%
Turnover: .25
Minimum acceptable return: 10%
What is Diamond's return on investment?

Accepted Answer

Return on Investment (ROI) is calculated as Profit Margin multiplied by Turnover. Here, ROI = 20% * 0.25 = 5%.

Question 6

Match Corporation has provided the following information:
Total assets: $200,000
Profit margin: 30%
Turnover: .20
Minimum acceptable return: 12%
What is Match's return on investment?

Accepted Answer

The return on investment (ROI) can be calculated using the formula ROI = Profit Margin * Turnover. Given a profit margin of 30% (or 0.30) and a turnover of 0.20, the ROI = 0.30 * 0.20 = 0.06, or 6%.

Question 7

Match Corporation has provided the following information:
Total assets: $200,000
Profit margin: 10%
Turnover: .20
Minimum acceptable return: 12%
Operating income: $30,000
What is Match's residual income?

Accepted Answer

Residual income is calculated as operating income minus the product of the minimum acceptable return rate and total assets. Here, it's $30,000 - (12% of $200,000) = $30,000 - $24,000 = $6,000.

Question 8

Return on investment is calculated by dividing:

Accepted Answer

The answer of Return on investment is calculated by dividing:
...

Question 9

The capital turnover ratio is calculated by dividing:

Accepted Answer

The capital turnover ratio, also known as the asset turnover ratio, is calculated by dividing sales or revenue by total assets. This measures how efficiently a company uses its assets to generate sales.

Question 10

Return on investment is calculated by:

Accepted Answer

Return on investment (ROI) is calculated by multiplying the profit margin (net profit divided by sales) by the investment turnover (sales divided by total assets). This formula gives an indication of how well a company is using its assets to generate profits.

Question 11

The Beech Division had a return on investment of 16% last year. Which of the following investment
Opportunities would Beech's management consider for the upcoming year given that Beech's
Management is evaluated using return on investment?

Accepted Answer

Investments with a return on investment (ROI) of at least 16% would be considered because they match or exceed Beech Division's current ROI, aligning with the goal of maintaining or improving the division's performance.

Question 12

The management of Mullen Division has provided the following information:
Operating assets: $600,000
Operating income: $90,000
Sales: $300,000
Management is considering investing in an additional project costing $60,000; it is estimated that the project will create operating income of $7,200. Mullen's minimum desired rate of return is 10%. Should Mullen's management invest in the project if management is evaluated using residual income?

Accepted Answer

The project's return on investment (ROI) is calculated as $7,200 / $60,000 = 12%, which exceeds the minimum desired rate of return of 10%. Therefore, the project is financially viable based on the residual income evaluation method.

Question 13

The management of Mullen Division has provided the following information:
Total assets: $600,000
Operating income: $90,000
Sales: $300,000
Management is considering investing in an additional project costing $60,000; it is estimated that the project will create operating income of $7,200. Mullen's minimum acceptable rate of return is 10%. Which of the following statements is incorrect?

Accepted Answer

DExplanation:- The return on investment (ROI) for the new project is calculated as the operating income generated by the project divided by the cost of the project, which is $7,200 / $60,000 = 12%. Mullen's current ROI is $90,000 / $600,000 = 15%. Adding a project with a lower ROI than the current ROI will actually decrease the overall ROI, making statement C incorrect.- Residual income is calculated as operating income minus a charge for the capital used, based on the minimum acceptable rate of return. For the new project, the charge for capital is $60,000 * 10% = $6,000. The project's operating income is $7,200, so the residual income from the project is $7,200 - $6,000 = $1,200. This means the overall residual income for Mullen will increase with the project, making statement D incorrect because it is presented as a correct statement, implying the question asked for incorrect statements.

Question 14

The management of Mullen Division has provided the following information:
Total assets: $600,000
Operating income: $90,000
Sales: $300,000
Management is considering investing in an additional project costing $60,000; it is estimated that the project will create operating income of $7,200. Mullen's minimum acceptable rate of return is 10%. How much is Mullen's overall residual income if the investment is made?

Accepted Answer

Residual income = Operating income - (Minimum acceptable rate of return * Total assets)= $90,000 - (0.10 * $600,000)= $90,000 - $60,000= $30,000After investment:Residual income = ($90,000 + $7,200) - (0.10 * $660,000)= $97,200 - $66,000= $31,200

Question 15

Which of the following is not taken into consideration when calculating return on investment?

Accepted Answer

The return on investment (ROI) calculation typically involves assessing the profit margin, capital turnover, and sales to determine the efficiency of an investment. The target rate of return, however, is a goal or expectation set by investors for the future and is not directly used in calculating the current ROI.

Question 16

Which of the following is not taken into consideration when calculating residual income?

Accepted Answer

Residual income is calculated to assess the net operating income earned above the minimum required return on its operating assets. It considers operating income, a minimum target rate of return, and total assets to determine the excess income generated. Capital turnover, which is a measure of how efficiently a company uses its assets to generate sales, is not directly considered in the calculation of residual income.

Question 17

Which of the following is not taken into consideration when calculating economic value added?

Accepted Answer

The answer of Which of the following is not taken...

Question 18

Waddington Corporation currently has a return on investment of 12%. The Madrid division is reporting residual income of $1,000,000 and a 14% return on investment. The Madrid division is contemplating an investment opportunity which has an 11% return on investment and a positive residual income. Should Madrid division's management make the investment if goal congruence is important to the Waddington Corporation?

Accepted Answer

The investment opportunity has a positive residual income, which means it will increase the overall residual income of Waddington Corporation, aligning with the goal of maximizing residual income.

Question 19

Canton Corporation currently has a return on investment of 14%. The Potsdam division is reporting residual income of $500,000 and a 12% return on investment. The Potsdam division is contemplating an investment opportunity which has a 13% return on investment and a positive residual income. Should Potsdam division's management make the investment if goal congruence is important to the Canton Corporation?

Accepted Answer

Canton Corporation's residual income will increase with the new investment since it has a positive residual income, indicating that it earns more than the corporation's required rate of return, contributing to overall profitability despite the investment's ROI being less than the corporation's current ROI.

Question 20

Norwood Company has a return on investment of 10%, operating income of $200,000, and a capital turnover of 4.0. How much were Norwood's total assets?

Accepted Answer

Return on investment = Operating income / Total assets * Capital turnover10% = $200,000 / Total assets * 4.0Total assets = $200,000 / (10% * 4.0)Total assets = $200,000 / 0.4Total assets = $2,000,000

Quiz 23: Performance Evaluation and the Balanced Scorecard

Which of the following statements pertaining to residual income is correct?

Which of the following will not change a company's return on investment?

Which of the following will not result in an increase in both return on investment and residual Income?

Diamond Company has provided the following information: Total assets: $100,000 Profit margin: 20% Turnover: .25 Minimum acceptable return: 10% What is Diamond's return on investment?

Match Corporation has provided the following information: Total assets: $200,000 Profit margin: 30% Turnover: .20 Minimum acceptable return: 12% What is Match's return on investment?

Match Corporation has provided the following information: Total assets: $200,000 Profit margin: 10% Turnover: .20 Minimum acceptable return: 12% Operating income: $30,000 What is Match's residual income?