Question 1

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 2

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 statement is true. The corporate charge for a division's investment is calculated using the Weighted Average Cost of Capital (WACC), which is a weighted average of the after-tax cost of debt and the cost of equity.

Question 3

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

An increase in assets, such as receivables, would lead to a decrease in return on investment because the same amount of income is being spread over a larger asset base. Similarly, a decrease in operating income would also lead to a decrease in return on investment. Therefore, the statement is false.

Question 4

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:
 $$\begin{array} { | l | r | r | r | } 
\hline &  { \text { Ohio } } & { \text { Dallas } } & { \text { Texas } } \
\hline \text { Revenue } & \$ 1,200,000 & \$ 1,500,000 & \$ 1,800,000 \
\hline \text { Operating assets } & 700,000 & 500,000 & 600,000 \
\hline \text { Net operating income } & 105,000 & 115,000 & 120,000 \
\hline
\end{array}$$ 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 5

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

Accepted Answer

The weighted average cost of capital (WACC) is the cost of financing for an entire company, taking into account both equity and debt, while the required rate of return is specific to an individual investment. The calculation for WACC involves weighting the cost of equity and debt by their respective proportions in the company's capital structure.

Question 6

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 7

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

Accepted Answer

Historical costs are costs that have already been incurred and are recognized by accrual accounting procedures. This includes costs for assets or expenses that have already been paid for and recorded in the accounting books. Therefore, historical costs are usually recognized by accrual accounting procedures.

Question 8

Reducing the investment base involves decreasing idle cash,managing credit judiciously,determining proper inventory levels,and spending carefully on long-term assets.

Accepted Answer

Reducing the investment base involves taking actions such as utilizing idle cash, managing credit efficiently, maintaining optimal inventory levels, and spending cautiously on long-term assets. This helps in minimizing the amount of money tied up in the business, which in turn can improve profitability and liquidity.

Question 9

Return on sales measures how effectively costs are managed.

Accepted Answer

Return on sales (ROS) is a financial ratio that indicates how efficiently a company is managing its costs relative to its sales, by showing the percentage of revenue that turns into profit.

Question 10

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

This statement accurately reflects the principles of the DuPont method.

Question 11

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 question does not provide enough information to determine what "the" refers to, but as a standalone statement, "the" is a grammatically correct word.

Question 12

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:
 $$\begin{array} { | l | r | r | r | } 
\hline & \text { Maple Street } & \text { Oak Street } & \text { High Street } \
\hline \text { Revenue } & \$ 17,000,000 & \$ 13,500,000 & \$ 15,000,000 \
\hline \text { Operating assets } & 7,000,000 & 7,000,000 & 6,000,000 \
\hline \text { Net operating income } & 900,000 & 1,200,000 & 980,000 \
\hline
\end{array}$$ 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 13

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

Accepted Answer

Return on investment (ROI) and residual income (RI) measures take into account both the profitability and efficiency of a business, while return on sales (ROS) only measures profitability. As a result, ROI and RI are better suited to evaluate overall aggregate performance since they provide a more comprehensive view of a business's financial performance.

Question 14

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.

Accepted Answer

Operating income can be affected by the size of the investment, and comparing two companies based solely on this metric may not provide an accurate picture of their relative financial performance. For example, a company with a large investment may have a higher operating income than a company with a smaller investment, even if the smaller company is performing better on a per-investment basis. Therefore, it is important to consider other factors, such as return on investment or profit margin, when comparing two companies.

Question 15

Answer the following questions using the information below:
Coldbrook Company has two sources of funds: long-term debt with a market and book value of $15 million issued at an interest rate of 10%, and equity capital that has a market value of $9 million (book value of $5 million). 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 30%.
 $$\begin{array} { | l | r | r | r | } 
\hline & \text { Operating Income } & \text { Assets } & \text { Current Liabilities } \
\hline \text { Bish Bash Falls } & \$ 815,000 & \$ 3,750,000 & \$ 800,000 \
\hline \text { Brooksville } & \$ 1,100,000 & \$ 5,000,000 & \$ 1,200,000 \
\hline \text { Stonybrook } & \$ 2,450,000 & \$ 9,250,000 & \$ 3,180,000 \
\hline
\end{array}$$
-What is the EVA for Stonybrook?
A) $1,108,000
B) $1,168,700
C) $1,315,063
D) $1,403,063

Accepted Answer

The answer of Answer the following questions using the information...

Question 16

Moto Corp allows its divisions to operate as autonomous units.The operating data for 2015 follow:
 $$\begin{array} { | l | r | r | r | } 
\hline &  \text { Plows } & \text { Tractors }  & \text { Combines }  \
\hline \text { Revenues } & \$ 2,250,000 & \$ 500,000 & \$ 4,800,000 \
\hline \text { Accounts receivable } & 800,000 & 152,500 & 1,435,000 \
\hline \text { Operating assets } & 1,000,000 & 400,000 & 1,750,000 \
\hline \text { Net operating income } & 220,000 & 60,000 & 480,000 \
\hline \text { Taxable income } & 165,000 & 90,000 & 385,000 \
\hline
\end{array}$$ 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 17

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 18

Return on investment is an accounting measure of income minus a dollar amount for required return on an accounting measure of investment.

Accepted Answer

The answer of Return on investment is an accounting measure...

Question 19

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

Accepted Answer

Companies that adopt the EVA concept usually define investment as total assets employed minus current liabilities. This is because EVA's main goal is to measure a company's financial performance based on the amount of capital invested in the business.

Question 20

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.

Quiz 23: Performance Measurement, compensation, and Multinational Considerations