Question 1

Reducing the investment base to improve ROI involves decreasing idle cash, paying down debt, determining proper inventory levels, and spending carefully on long-term assets.

Accepted Answer

Reducing the investment base involves decreasing idle cash, determining proper inventory levels, and spending carefully on long-term assets. Paying down debt doesn't affect the investment part (denominator) of the ROI calculation.

Question 2

The objective of maximizing return on investment may induce managers of highly profitable divisions to reject projects that from the viewpoint of the overall organization should be accepted.

Accepted Answer

The objective of maximizing return on investment may lead managers of highly profitable divisions to prioritize their own division's ROI over the overall organization's ROI, resulting in the rejection of projects that should be accepted for the benefit of the organization as a whole.

Question 3

Antique Corp uses the investment center concept for the museums that it manages. Selected operating data for three of its museums for 2015 are as follows:
  
Required:
a.Compute the return on investment for each division.
b.Which museum manager is doing best based only on ROI? Why?
c.What other factors should be included when evaluating the managers?

Accepted Answer

The answer of Antique Corp uses the investment center concept...

Question 4

To evaluate overall performance, return on investment and residual income measures are more appropriate than return on sales.

Accepted Answer

Return on investment (ROI) and residual income are more appropriate measures of overall performance because they take into account both the income and the capital used to generate that income, while return on sales only considers income in relation to sales. Therefore, ROI and residual income provide a more accurate picture of efficiency and profitability.

Question 5

Return on investment, Residual income, or Economic value added measures are more appropriate than return on sales because they consider only the investment to measure the performance.

Accepted Answer

Return on investment, Residual income, or Economic value added measures are more appropriate than return on sales because they consider both income and investment to measure the performance.

Question 6

Coldbrook Company has two sources of funds: long-term debt with a market and book value of $17,000,000 issued at an interest rate of 11%, and equity capital that has a market value of $6,000,000 (book value of $5,500,000). Coldbrook Company has profit centers in the following locations with the following operating incomes, total assets, and current liabilities. The cost of equity capital is 15%, while the tax rate is 35%.

What is the EVA® for Stonybrook? (Round intermediary calculations to four decimal places.)

Accepted Answer

WACC = [(0.11 × (1 - 0.35) × $17,000,000) + (0.15 × $6,000,000)] / $23,000,000 = 0.0920
Stonybrook () = ($2,700,000 × (1 - 0.35)) - [0.0920 × ($9,600,000 - $3,400,000)]
= $1,184,600

Question 7

Moto Corp allows its divisions to operate as autonomous units. The operating data for 2015 follow:
  
Required:
a.Compute the investment turnover for each division.
b.Compute the return on sales for each division.
c.Compute the return on investment for each division.
d.Which division manager is doing best? Why?
e.What other factors should be included when evaluating the managers?
For parts (b) and (c) income is defined as operating income.

Accepted Answer

The answer of Moto Corp allows its divisions to operate...

Question 8

In an EVA calculation, the appropriate measure of a division's profit would be that division's pre-tax operating income.

Accepted Answer

In an EVA calculation, the appropriate measure of a division's profit would be that division's after tax operating income.

Question 9

Return on sales can provide how effectively costs are managed and is part of the DuPont method of profitability analysis.

Accepted Answer

Return on sales (ROS) is a measure of a company's profitability that shows how effective it is at managing costs. It is calculated by dividing net income by total revenue. The DuPont method of profitability analysis breaks down return on sales into two components: profit margin and asset turnover.

Question 10

Gas Supply Corporation uses the investment center concept for the gasoline stations that it manages in the city. Consolidated has a 15% required rate of return on investment in order for a branch station to be viable. Select operating data for three of its stations for 2015 are as follows:
  
Required:
a.Compute the return on investment for each station.
b.Which station manager is doing best based only on ROI? Why?
c.Are any of the stations in danger of being closed due to lack of performance?
d.What other factors should be included when evaluating the managers?

Accepted Answer

The answer of Gas Supply Corporation uses the investment center...

Question 11

All other things held constant, increase in assets such as receivables or decrease in operating income results in an increase in return on investment.

Accepted Answer

All other things held constant, decrease in assets such as receivables or increase in operating income results in an increase in return on investment.

Question 12

Historical costs are costs recognized in particular situations that are not usually recognized by accrual accounting procedures.

Accepted Answer

Imputed costs are costs recognized in particular situations that are not usually recognized by accrual accounting procedures.

Question 13

In an EVA calculation, the measure of the invested capital for a division would be that division's assets minus that division's long-term liabilities.

Accepted Answer

In an Economic Value Added calculation, the measure of the invested capital for a division would be that division's assets minus that division's current liabilities.

Question 14

In an EVA calculation, the corporate charge for a division's investment is based on a weighted average of the after-tax interest rate on the firm's debt and the cost of the firm's equity.

Accepted Answer

This is correct. The corporate charge used in EVA calculations is a weighted average of the after-tax interest rate on debt and the cost of equity. This reflects the opportunity cost of capital and the actual cost of funding the division's investments.

Question 15

Companies that adopt the EVA concept define investment as total assets employed minus current liabilities.

Accepted Answer

This is the correct definition of investment according to the EVA concept.

Question 16

Economic value added, unlike residual income, charges managers for the costs of their investments in long-term assets and working capital.

Accepted Answer

Both economic value added and residual income charge managers for the costs of their investments in long-term assets and long-term capital.

Question 17

Return on investment can be calculated by multiplying return on assets by investment turnover.

Accepted Answer

return on investment can be calculated by multiplying return on sales x investment turnover

Question 18

The DuPont method recognizes the two basic ingredients in profit making: increasing the income per dollar of revenues and using assets to generate more revenues.

Accepted Answer

The DuPont method is based on the idea that profit can be increased by improving both the income per dollar of revenues and the efficiency of using assets to generate more revenues.

Question 19

Required rate of return multiplied by the investment is the weighted average cost of the investment.

Accepted Answer

Required rate of return multiplied by the investment is the opportunity cost of the investment.

Question 20

Home Decor Inc., manufactures home cleaning products. The company has two divisions, Bleach and Cleanser. Because of different accounting methods and inflation rates, the company is considering multiple evaluation measures. The following information is provided for 2018:
ASSETSINCOME

The company is currently using a 15% required rate of return.
What are Bleach's and Cleanser's residual incomes based on book values, respectively?

Accepted Answer

The answer of Home Decor Inc., manufactures home cleaning products....

Quiz 23: Performance Measurement, Compensation, and Multinational Considerations