Question 1

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 sales?

Accepted Answer

The answer of Norwood Company has a return on investment...

Question 2

Madrid Company has a return on investment of 12.5%, sales of $4,000,000, and a profit margin of 5%. How much were Madrid's total assets?

Accepted Answer

Return on Investment (ROI) is calculated as (Net Profit / Total Assets). Given ROI is 12.5% and profit margin is 5%, the net profit is 5% of $4,000,000, which is $200,000. Using the formula $200,000 / Total Assets = 12.5%, Total Assets = $200,000 / 0.125 = $1,600,000.

Question 3

Hancock Corporation has a capital turnover of 2, sales of $500,000, and a return on investment of 4%. What was Hancock's operating income??

Accepted Answer

Operating income can be found by multiplying the return on investment (ROI) by the total assets. ROI is given as 4%, and since capital turnover is sales divided by total assets, total assets are $500,000 / 2 = $250,000. Therefore, operating income is 4% of $250,000, which is $10,000.

Question 4

Profile Corporation has total assets of $600,000, an 11% target rate of return, and a residual income of
$6,000. Which of the following statements is incorrect?

Accepted Answer

The answer of Profile Corporation has total assets of $600,000,...

Question 5

Crimpy Company has total assets of $900,000, a 10% target rate of return, and a residual income of ($4,500). Which of the following statements is correct?

Accepted Answer

Crimpy's operating income can be calculated using the formula for residual income: Operating Income - (Target Rate of Return * Total Assets) = Residual Income. Solving for Operating Income gives $85,500.

Question 6

Grand Company has total assets of $700,000, a 12% target rate of return, a return on investment of 14%, and a 10% weighted average cost of capital. What is Grand's residual income?

Accepted Answer

Residual income = (Actual return on investment - Target return on investment) * Total assets= (14% - 12%) * $700,000= 2% * $700,000= $14,000

Question 7

Gallop Company has total assets of $600,000, a 10% target rate of return, a return on investment of 12%, an 8% weighted average cost of capital, and current liabilities of $100,000. What is Gallop
 Company's economic value added assuming that the income tax rate is 40%?

Accepted Answer

Economic Value Added (EVA) is calculated as NOPAT - (Capital * WACC). NOPAT is calculated as ROI * Total Assets * (1 - Tax Rate). Here, NOPAT = 12% * $600,000 * (1 - 0.4) = $43,200. Capital = Total Assets - Current Liabilities = $600,000 - $100,000 = $500,000. EVA = $43,200 - ($500,000 * 8%) = $43,200 - $40,000 = $3,200.

Question 8

Marx Company has total assets of $400,000, a 14% target rate of return, a $10,000 residual income, a 10% weighted average cost of capital, and current liabilities of $80,000. What is Marx Company's
 economic value added assuming that the income tax rate is 30%?

Accepted Answer

The answer of Marx Company has total assets of $400,000,...

Question 9

Herb Corporation has provided the following information:
$$\begin{array} { | l | l | } 
\hline \text { Current assets } & \$ 200,000 \
\hline \text { Total assets } & \$ 750,000 \
\hline \text { Total liabilities } & \$ 300,000 \
\hline \text { Current liabilities } & \$ 100,000 \
\hline \text { Weighted average cost of capital } & 10 \% \
\hline \text { Operating income } & \$ 140,000 \
\hline \text { Target rate of return } & 12 \% \
\hline \text { Income tax rate } & 40 \% \
\hline
\end{array}$$

Accepted Answer

The residual income is calculated as Operating Income - (Total Assets * Target Rate of Return). Operating Income is $140,000. Total Assets are $750,000, and the Target Rate of Return is 12%, so the calculation is $140,000 - ($750,000 * 12%) = $140,000 - $90,000 = $50,000. However, since the income tax rate is 40%, we need to adjust the residual income for taxes: $50,000 * (1 - 0.40) = $50,000 * 0.60 = $30,000. The error in my explanation is that the residual income calculation does not directly adjust for taxes in this manner. The correct calculation should simply be $140,000 - ($750,000 * 12%) = $140,000 - $90,000 = $50,000 without adjusting for taxes, as taxes have presumably already been accounted for in the operating income. Therefore, the correct answer reflecting the residual income without tax adjustment is indeed $50,000, making my initial choice incorrect.

Question 10

Herb Corporation has provided the following information:
$$\begin{array} { | l | l | } 
\hline \text { Current assets } & \$ 200,000 \
\hline \text { Total assets } & \$ 750,000 \
\hline \text { Total liabilities } & \$ 300,000 \
\hline \text { Current liabilities } & \$ 100,000 \
\hline \text { Weighted average cost of capital } & 10 \% \
\hline \text { Operating income } & \$ 140,000 \
\hline \text { Target rate of return } & 12 \% \
\hline \text { Income tax rate } & 40 \% \
\hline
\end{array}$$ What is Herb Corporation's residual income?

Accepted Answer

Residual income is calculated as operating income minus the product of total assets and the target rate of return. Here, it is $140,000 - ($750,000 * 12%) = $140,000 - $90,000 = $50,000.

Question 11

Which of the following transactions will result in an increase in economic value added?

Accepted Answer

Paying off a long-term liability reduces the company's debt, potentially lowering interest expenses and increasing net operating profit after taxes, which can increase economic value added.

Question 12

Which of the following statements regarding the weighted average cost of capital is incorrect?

Accepted Answer

The weighted average cost of capital (WACC) represents the average rate of return required by all of a company's security holders, including both debt and equity. It does not have an inverse relationship with business risk; rather, as business risk increases, the WACC typically increases because investors demand higher returns for taking on more risk.

Question 13

Assuming a constant target rate of return and weighted average cost of capital, which of the following
Transactions will result in an increase in both residual income and economic value added?

Accepted Answer

Paying off a long-term liability reduces the capital charge, increasing both residual income and economic value added.

Question 14

The Gnome Company has provided the following information:
$$\begin{array} { | l | l | } 
\hline \text { Income tax rate } & 30 \% \
\hline \text { Target rate of return } & 12 \% \
\hline \text { Total assets } & \$ 300,000 \
\hline \text { Total liabilities } & \$ 150,000 \
\hline \text { Current liabilities } & \$ 50,000 \
\hline \text { Operating income } & \$ 40,000 \
\hline \text { Economic value added } & \$ 3,000 \
\hline
\end{array}$$ What was Gnome's weighted average cost of capital?

Accepted Answer

The Economic Value Added (EVA) is calculated as: EVA = NOPAT - (WACC * Capital). Given EVA = $3,000, NOPAT = $40,000 * (1 - 0.30) = $28,000, and Capital = Total assets - Current liabilities = $300,000 - $50,000 = $250,000. Solving for WACC gives WACC = (NOPAT - EVA) / Capital = ($28,000 - $3,000) / $250,000 = 10%.

Question 15

Capital turnover is decreased when:

Accepted Answer

Capital turnover decreases when a company purchases new assets without a proportional increase in sales, as it increases the denominator (total assets) in the capital turnover ratio without increasing the numerator (sales).

Question 16

A decrease in the income tax rate will:

Accepted Answer

The answer of A decrease in the income tax rate...

Question 17

The residual income formula is:

Accepted Answer

The answer of The residual income formula is:
...

Question 18

Which of the following is irrelevant with respect to calculating economic value added?

Accepted Answer

The answer of Which of the following is irrelevant with...

Quiz 23: Performance Evaluation and the Balanced Scorecard

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 sales?

Madrid Company has a return on investment of 12.5%, sales of $4,000,000, and a profit margin of 5%. How much were Madrid's total assets?

Hancock Corporation has a capital turnover of 2, sales of $500,000, and a return on investment of 4%. What was Hancock's operating income??

Profile Corporation has total assets of $600,000, an 11% target rate of return, and a residual income of $6,000. Which of the following statements is incorrect?

Crimpy Company has total assets of $900,000, a 10% target rate of return, and a residual income of ($4,500) . Which of the following statements is correct?