Question 1

A major weakness of comparing two companies using only operating incomes as the basis of comparison is that it ignores the differences in the size of the investment and therefore any concept of yield or return on investment.

Accepted Answer

Operating incomes only reveal the profitability of a company and not the effectiveness of its investment. Therefore, comparing two companies based only on operating incomes would give a misleading impression of their performance.

Question 2

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

Accepted Answer

The statement is true. Return on sales is a measure of how effectively costs are managed and is one of the components of the DuPont method of profitability analysis. It is calculated by dividing net income by total sales revenue.

Question 3

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 4

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. ) A)$1,184,600 B)$1,755,000 C)$570,400 D)$658,693

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)]
 11ea8a5a_9f99_fca6_a19c_d37f9a0996b2_TB5540_00_TB5540_00_TB5540_00 = $1,184,600

Question 5

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 focus on maximizing returns on investment within a division may cause managers to prioritize projects that yield higher returns in the short term, disregarding the potential benefit to the organization as a whole. This can result in rejection of projects that may not yield a high return in the short term but could bring long-term benefits to the organization.

Question 6

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 7

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 does recognize the two basic ingredients in profit making as increasing the income per dollar of revenues and using assets to generate more revenues.

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

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 10

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

Accepted Answer

This statement is true. The Economic Value Added (EVA) concept defines investment as the total assets employed in a company's operations, less current liabilities, which is sometimes referred to as net assets. EVA is a measure of a company's financial performance based on the residual wealth calculated after deducting the cost of capital from the net operating profit after tax.

Question 11

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 12

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 13

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 14

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 15

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 16

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

Accepted Answer

Return on investment and residual income take into account the amount of resources or assets utilized to generate a certain level of profit, which is a more comprehensive measure of overall performance than return on sales alone. Return on sales only measures the percentage of profits generated from sales revenue, which does not take into account the expenses and investments made to generate that revenue.

Question 17

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 18

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 19

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 true. The corporate charge, also known as the cost of capital, used in EVA calculation is the weighted average cost of debt and equity.

Question 20

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.

Quiz 23: Performance Measurement, compensation, and Multinational Considerations