Deck 20: Management Compensation, Business Analysis, and Business Valuation

Question 1

As a firm's strategy changes to respond to different stages of a product's life cycle, compensation:

A)Can be affected.
B)Is affected, but only to a very limited extent.
C)Should change in response to the new strategy.
D)Should increase.
E)Should decrease.

Answer 1

C

Question 2

In developing compensation plans, the management accountant works to achieve fairness by making the plan:

A)Precise, comprehensive and directive.
B)Simple, clear and consistent.
C)Attractive.
D)Rewarding.
E)Selective.

Answer 2

B

Question 3

Bonus plans should be tied to variable cost income which is not affected by inventory level changes, rather than the conventional:

A)Tax-based net income.
B)Marginal cost income.
C)Full cost income.
D)Operating income.

Answer 3

C

Question 4

The stock option form of bonus payments to managers usually:

A)Motivates well even in extended market downturns.
B)Can lose some motivation because of the delay in reward.
C)Focuses on the short-term.
D)Is not consistent with shareholder interests.
E)Has less risk than other types of bonus payment plans.

Question 5

If fairness only is considered, unit managers prefer:

A)Not to be evaluated.
B)A subjective measure.
C)An informal evaluation.
D)A firm-wide pool over a unit-based pool.
E)A unit-based pool over a firm-wide pool.

Question 6

The objectives of management compensation, when compared to the objectives used to develop performance measurement systems, are:

A)More numerous.
B)Less specific.
C)Consistent in their objectives.
D)Significantly broader in scope.
E)More specific.

Question 7

In management compensation, the use of the balanced scorecard achieves:

A)Fairness.
B)Alignment of manager's incentives and the organization's strategy.
C)The desired ethical environment.
D)Revenue generation and cost control.
E)A specific non-financial measurement.

Question 8

Risk aversion by managers should be recognized when revising compensation plans because:

A)Compensation mix (salary, bonus) can influence a manager's risk aversion.
B)Most companies want risk averse managers.
C)Most companies want risk taking managers.
D)It costs less to pay risk averse managers.

Question 9

Market value of equity is an objective measure which clearly shows what:

A)The firm's financial statements show the firm's value to be.
B)Investors think is the firm's value.
C)Stock analysts calculate as the firm's value.
D)Is the sales value of the firm.
E)Is the liquidation value of the firm.

Question 10

Due in part to the failure of many banks in 2008, executive compensation is getting increased oversight by:

A)Audit committees of corporate boards.
B)Top management.
C)Compensation committees of corporate boards.
D)Banking regulators and corporate compensation committees.
E)Banking regulators such as the SEC.

Question 11

Any system of compensation:

A)May encourage unethical behavior.
B)Must be approved by the appropriate regulatory authority.
C)Should be designed by top management.
D)Must be approved by the auditor.

Question 12

The receivables turnover ratio is a measure of:

A)Asset value.
B)Leverage.
C)Sales performance.
D)Profitability.
E)Liquidity.

Question 13

When strategic performance measures or critical success factors are used to determine bonus compensation, the bonus will usually depend either on the amount of improvement in the measure or on:

A)Maintaining the current level.
B)Achieving a predetermined goal.
C)Quality of work completed.
D)Intensity of effort expended.

Question 14

Bases for management bonus compensation often include:

A)Stock price performance.
B)Percentage of salary.
C)Achievement of break-even sales.
D)Percentage of firm-wide net income.

Question 15

The ideal compensation plan would make all company contributions to the plan immediately tax-deductible and all tax consequences for managers:

A)Insignificant.
B)Deferred or avoidable.
C)Limited, but current.
D)Limited, but pre-paid.

Question 16

Generally, the current and deferred types of bonus payment options currently in use tend to focus the manager's attention on short-term performance measures, most commonly:

A)Division profit.
B)After tax corporate profit.
C)Cash flow.
D)Growth in firm value.
E)Stock price.

Question 17

Of the three basic forms of management compensation (salary, bonus, benefits), the fastest growing part of total compensation is:

A)Salary.
B)Bonus.
C)Benefits.
D)Salary and bonus.

Question 18

A bonus usually differs from a salary in terms of:

A)Amount and timing.
B)Base, timing, and financial statement effect.
C)Tax implications.
D)Motivation effects.
E)Base, pool, and payment terms.

Question 19

The balanced scorecard critical success factors (CSFs) provide strong motivation in bonus compensation plans if the non-controllable factors are:

A)Emphasized.
B)Separated.
C)Recognized.
D)Excluded.
E)Controlled.

Question 20

The balanced scorecard evaluation of the firm is an especially strong financial tool because of its:

A)Use of qualitative measures.
B)Use of quantitative measures.
C)Simplicity in use.
D)Ability to predict change.
E)Use of multiple critical success factors (CSFs).

Question 21

A method for determining a bonus based upon the performance of the firm is a(n):

A)Segment-based pool.
B)Unit-based pool.
C)Firm-based pool.
D)Activity-based pool.
E)Volume-based pool.

Question 22

The price-earnings ratio for firms in the Standard & Poor's 500 Index has averaged _____ over the last 50 years.

A)11.
B)16.
C)17.
D)23.
E)30.

Question 23

Which one of the following computes value based on annual earnings?

A)Discounted cash flow method.
B)Cash flow liquidity method.
C)Multiples-based method.
D)Profitability method.
E)Purchasing power method.

Question 24

Jackson Supply Company has a 2 to 1 current ratio. This ratio would increase to more than 2 to 1 if the company:

A)Purchased a marketable security for cash.
B)Wrote off an uncollectible receivable.
C)Sold merchandise on account that earned a normal gross margin.
D)Purchased inventory on account.

Question 25

Since it is based on cash flows, the discounted cash flow (DCF) method of valuation has the added advantage that it is not subject to the bias of different:

A)Discount rates.
B)Internal rates of return.
C)Monetary systems.
D)Accounting policies for determining total assets and net income.

Question 26

A method for determining a bonus based upon the performance of the unit is a(n):

A)Segment-based pool.
B)Unit-based pool.
C)Firm-based pool.
D)Activity-based pool.
E)Function-based pool.

Question 27

All of the following are listed as common payment options for bonus compensation plans except:

A)Performance shares.
B)Current bonus.
C)Deferred bonus.
D)Preferred bonus.
E)Stock options.

Question 28

A current bonus can consist of:

A)Cash only.
B)Stock only.
C)Cash and/or stock.
D)Membership in a fitness club.

Question 29

A deferred bonus can consist of:

A)Cash only.
B)Stock only.
C)Cash and/or stock.
D)Membership in a fitness club.

Question 30

Which one of the following develops the value of the firm as the present value of the firm's net free cash flows?

A)Discounted cash flow method.
B)Cash flow liquidity method.
C)Multiples-based method.
D)Profitability method.
E)Purchasing power method.

Question 31

The total amount of the bonus pool for 2011 is:

A)$145,000.
B)$218,000.
C)$141,000.
D)$174,000.
E)$360,000.

Question 32

Each one of the following is a method for directly measuring the value of a firm's equity except:

A)The discounted cash flow method.
B)Market value.
C)Sales multiple.
D)Earnings-based valuation.
E)Enterprise value.

Question 33

Benefits include all of the following except:

A)Travel.
B)Life insurance.
C)Medical benefits.
D)Membership in a fitness club.
E)Performance shares.

Question 34

Which one of the following forms of compensation includes special services and benefits for the employee?

A)Perk.
B)Stock option.
C)Performance shares.
D)Bonus.
E)Salary.

Question 35

Which one of the following refers to the firm's ability to pay its current operating expenses and maturing debt?

A)Discounted cash flow.
B)Liquidity.
C)Earnings base.
D)Profitability.
E)Purchasing power.

Question 36

The multiplier used in an earnings-based method of valuation of a firm is often estimated from the price-to-earnings ratios of the stocks of comparable:

A)Taxable entities.
B)Industries.
C)Firms.
D)For-profit firms.
E)Publicly-held firms.

Question 37

In service firms, improvement in long term profitability is best measured by all the following except:

A)Staff utilization.
B)Net revenues.
C)Collections of customer accounts.
D)Materials usage.

Question 38

Which one of the following items is not a measure of a company's liquidity?

A)Accounts receivable turnover.
B)Return on equity.
C)Quick ratio.
D)Cash flow ratio.
E)Day's sales in inventory.

Question 39

Which one of the following forms of compensation is a based upon the achievement of performance goals for current the period?

A)Perk.
B)Stock option.
C)Performance shares.
D)Bonus.
E)Salary.

Question 40

The profit multiplier used by service firms measures:

A)Efficiency.
B)Effectiveness.
C)Net revenue.
D)Collectability.
E)Accountability.

Question 41

Which of the following would not play a strategic role in management compensation?

A)Ethical issues.
B)Strategic conditions facing the firm.
C)The effect of a change in financial reporting method.
D)The effect of risk aversion on managers' decision making.

Question 42

An increase in the market price of a company's common stock will immediately affect its:

A)Stock return.
B)Debt to equity ratio.
C)Earnings per share.
D)Economic value added.
E)Return on equity.

Question 43

Which of the following is a liquidity ratio?

A)Gross margin ratio.
B)Return on Assets ratio.
C)Quick ratio.
D)Earnings per share.

Question 44

The commonly used approaches for business valuation include:

A)Option A
B)Option B
C)Option C
D)Option D
E)Option E

Question 45

Salary is:

A)A fixed payment that includes a bonus.
B)A fixed payment that includes benefits.
C)A benefit that includes a bonus.
D)A fixed payment.

Question 46

Which of the following would explain why a manager would elect to defer bonus compensation to future years?

A)Interest rates are expected to decrease.
B)The firm will be issuing an initial public offering in the near future.
C)To show dedication to the company.
D)To avoid or defer taxes.

Question 47

Compensation plans for high-level managers and executives are usually explained in the firm's:

A)Management Discussion and Analysis (MD&A).
B)Income Statement.
C)Notes to the Financial Statements.
D)Proxy Statement.

Question 48

EVA is calculated as:

A)EVA Net Income - (Cost of Capital x EVA Invested Capital).
B)Total Net Income - (Cost of Capital x Invested Capital).
C)Gross Income - Cost of Capital.
D)Total Net Income - EVA Net Income.
E)Accounting earnings adjusted for EVA.

Question 49

The total amount of the bonus pool for 2013 is:

A)$145,000.
B)$218,000.
C)$141,000.
D)$174,000.
E)$360,000.

Question 50

Return on sales in the household division in 2012 is (rounded):

A)6.34%
B)7.19%
C)7.88%
D)8.54%

Question 51

Asset turnover in the electronics division in 2013 is (rounded):

A)1.82
B)2.02
C).733
D)2.31

Question 52

Which one of the following has been the most common payment option for bonus compensation in recent years?

A)Vacation time.
B)Stock options.
C)Increased benefits.
D)Salary increase.

Question 53

In service firms, financial results can be measured by all the following except:

A)Staff utilization.
B)The profit multiplier.
C)Collections of accounts.
D)Throughput.

Question 54

Return on assets for the cosmetics division in 2011 is:

A)19.00%
B)22.00%
C)23.00%
D)18.00%

Question 55

Firms typically provide benefits (perks) to employees to enhance motivation. Which of the following would not be an example of a perk?

A)Company car.
B)Country club membership.
C)Stock options.
D)Executive life insurance.

Question 56

There is a common concern today that executive compensation in the U. S. is:

A)Not adequately linked to strategic performance measures.
B)Ineffective as a performance incentive.
C)Not properly disclosed to the IRS.
D)Varies too greatly from industry to industry.

Question 57

Methods for directly valuing a firm include:

A)Option A
B)Option B
C)Option C
D)Option D
E)Option E

Question 58

The total amount of the bonus pool for 2012 is:

A)$145,000.
B)$218,000.
C)$141,000.
D)$174,000.
E)$360,000.

Question 59

EVA is the acronym for:

A)Extra Value Assets.
B)Economic Volume Analysis.
C)Efficiency Volume Analysis.
D)Economic Value Added.

Question 60

Common bases of bonus compensation include:

A)Option A
B)Option B
C)Option C
D)Option D
E)Option E

Question 61

There is a current tax deduction for the firm for which of the following types of compensation?

A)Qualified stock options.
B)Nonqualified stock options.
C)Deferred bonus.
D)Current bonus.
E)Performance shares.

Question 62

The inventory turnover ratio for 2013 is (rounded):

A)11.2
B)12.7
C)13.7
D)14.9

Question 63

Return on equity for 2013 is (rounded):

A)11.6%
B)14.6%
C)15.5%
D)18.9%

Question 64

The accounts receivable turnover ratio for 2013 is (rounded):

A)11.2
B)12.7
C)13.7
D)14.9

Question 65

Performance shares grant stock for achieving certain performance goals:

A)In the following year.
B)In two years or more.
C)In the current period.
D)When stock prices improve.

Question 66

The value of the company, calculated using the free cash flow multiple for 2013 is:

A)$1,220,000
B)$1,620,000
C)$2,520,000
D)$8,400,000

Question 67

Which of the following types of compensation does not provide a deduction to the firm for tax purposes?

A)Perks.
B)Qualified stock options.
C)Retirement plans.
D)Current bonus.
E)Performance shares.

Question 68

Bonus payment options include all of the following except:

A)Perks.
B)Current bonus.
C)Deferred bonus.
D)Stock options.
E)Performance shares.

Question 69

A CFO whose compensation plan may have had the effect of creating an incentive for unethical actions includes:

A)Kenneth Lay
B)Scott Sullivan
C)Bernie Madoff
D)Dennis Kozlowski

Question 70

The market value of the company's equity for 2013 is:

A)$1,220,000
B)$1,620,000
C)$2,520,000
D)$8,400,000
E)$7,125,000

Question 71

The accounts receivable turnover ratio for 2013 is (rounded):

A)11.2
B)13.5
C)13.7
D)14.9

Question 72

Return on assets for 2013 is (rounded):

A)9.2%
B)16.4%
C)13.7%
D)19.2%

Question 73

The value of the company, calculated using the earnings multiple for 2013 is:

A)$1,220,000
B)$1,620,000
C)$2,520,000
D)$8,335,000

Question 74

The value of the company, calculated using the sales multiple for 2013 is:

A)$1,220,000
B)$1,620,000
C)$2,520,000
D)$8,400,000
E)$7,125,000

Question 75

The current ratio for 2013 is:

A)1.8
B)2.5
C)3.6
D)4.1

Question 76

The current ratio for 2013 is:

A)1.8
B)2.0
C)3.9
D)4.7

Question 77

Economic value added is calculated from:

A)Average total assets, current liabilities, net income, and the cost of capital.
B)EVA net income and EVA invested capital.
C)Net income, cost of capital, and net assets.
D)Net income and the cost of capital.
E)EVA net income, the cost of capital, and EVA invested capital.

Question 78

The inventory turnover ratio for 2013 is (rounded):

A)11.2
B)13.5
C)13.7
D)14.9

Question 79

The gross margin percentage for 2013 is (rounded):

A)11.2%
B)12.7%
C)13.7%
D)14.9%

Question 80

There is a current tax for the manager when which of the following types of compensation is received?

A)Qualified stock options.
B)Nonqualified stock options.
C)Deferred bonus.
D)Current bonus.
E)Performance shares.