Question 1

When measuring profit and invested capital, managers have to decide how they will define what will be included in invested capital, then apply that definition consistently throughout the one organisation. Identify and explain with an example, the three definitions of invested capital that can be applied.

Accepted Answer

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Question 2

When employees feel that they have made a significant achievement in reaching the purpose of the task they are working on, this has been identified (Robbins et al., 2004; Thomas, 2000) as:
A) competence.
B) progress.
C) meaningfulness.
D) choice.

Accepted Answer

The feeling of making progress towards a goal is what is being described in the question, which has been identified as a key factor in motivating employees. Competence refers to feeling capable of completing a task, meaningfulness relates to feeling like the task has personal significance, and choice refers to having a sense of autonomy or control over one's work. While these factors can also contribute to motivation, they are not specifically described in the given scenario.

Question 3

Value-based management (VBM) is a framework for making key decisions that add economic value to the business. Morin & Jarrell (2001) identified four aspects of VBM. Identify these four aspects and in your own words outline how these aspects assist managers in their decision making.

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Question 4

The following information is available for Jittie Ltd: 
The WACC for Jittie Ltd is:
A) 7.6%
B) 9.25%
C) 10.9%
D) 9.5%

Accepted Answer

The question does not provide sufficient information to calculate the WACC directly. Therefore, we need to use the information provided to calculate the cost of equity and cost of debt separately, and then calculate the weighted average of these costs using the given weights. The information provided (11eab3b4_6456_8c26_a5fb_f74bf86647b7_TB2559_00) does not give us any direct information about the company's capital structure, tax rate, or risk-free rate. Therefore, we cannot accurately calculate the WACC.

However, if we assume a typical capital structure for a company in this industry (e.g., 60% equity and 40% debt), a 30% tax rate, and a risk-free rate of 2.5%, we can estimate the WACC using the given cost of equity and cost of debt.

The cost of equity can be estimated using the CAPM model, which requires the risk-free rate, market risk premium, and the company's beta. The information provided does not give us the market risk premium or the company's beta. Therefore, we cannot accurately calculate the cost of equity. However, assuming a typical market risk premium of 5% and a beta of 1.2, we can estimate the cost of equity as:

Cost of equity = Risk-free rate + Beta * Market risk premium
              = 2.5% + 1.2 * 5%
              = 8.5%

The cost of debt can be estimated by looking at the company's current debt and interest payments. The information provided does not give us any direct information about the company's debt, but we can assume that the company has a typical interest coverage ratio of 4 and a current interest rate of 6%. This would imply a cost of debt of:

Cost of debt = Interest rate * (1 - Tax rate)
             = 6% * (1 - 30%)
             = 4.2%

Using these estimates and assuming a 60% equity and 40% debt capital structure, we can estimate the WACC as:

WACC = Cost of equity * Equity weight + Cost of debt * Debt weight
     = 8.5% * 0.6 + 4.2% * 0.4
     = 6.6%

However, it's important to note that these estimates are based on assumptions and may not accurately reflect Jittie Ltd's actual capital structure and cost of capital. Therefore, we cannot rule out the possibility that the actual WACC is different from our estimate.

Based on these factors, the best choice would be B, 9.25%, as the closest answer to the estimate of the cost of capital if we assume a typical industry and capital structure.

Question 5

Discuss three ways that the problems associated with using Return on Investment (ROI) can be minimised.

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Question 6

When employees have the opportunity in the larger scheme of things, to pursue a task that they consider worthy, this has been identified (Robbins et al., 2004; Thomas, 2000) as:
A) competence.
B) progress.
C) meaningfulness.
D) choice.

Accepted Answer

The opportunity to pursue a task that is considered worthy by employees relates to the concept of meaningfulness, which is the sense of belonging and significance in the work being done.

Question 7

Jasmine Dimm is a call centre manager for Tostra, a mobile phone company. Call centre operators at her call centre are responsible for answering calls from Tostra customers. Some calls are very short, relating to simple enquiries. However, a majority of calls tend to be longer, coming from irate customers complaining about Tostra's services. In these calls, customers are often very emotional and sometimes even abusive. Call operators have no control over what types of calls they get.
Jasmine has developed a new incentive system for her call centre staff. Under the new system, call centre operators are rewarded if they achieve two performance targets: (1) the duration of 90 per cent of the calls is less than 4 minutes and (2) 80 per cent of customers rate Tostra's 'customer service quality' as 'excellent'. Achieving these two monthly performance targets will result in a bonus worth 20 per cent of the call operator's monthly salary.
Based on expectancy theory, the major limitation(s) of Jasmine's reward system is:
A) the incentive system lacks valence and instrumentality.
B) the incentive system lacks expectancy.
C) the incentive system lacks instrumentality.
D) the incentive system lacks expectancy and instrumentality.

Accepted Answer

The incentive system lacks expectancy because call operators have no control over the types of calls they receive, making it difficult for them to consistently meet the performance targets.

Question 8

Which of the following statements about developing reward system is incorrect?
A) The key benefit of a profit sharing plan is to encourage employees to think like owners.
B) The key benefit of gain sharing plan is to introduce equity, ensuring the employees who contribute to the business can get a share of the gains.
C) The key benefit of an employee share plan is to reduce free-riding problems.
D) The key benefit of an individual-based incentive system is to highlight improved expectancy and instrumentality.

Accepted Answer

The key benefit of an employee share plan is typically to align the interests of the employees with those of the shareholders by making the employees themselves shareholders. It encourages long-term commitment and loyalty to the company, rather than specifically aiming to reduce free-riding problems. Free-riding problems are more directly addressed by designing incentive systems that ensure individual contributions are recognized and rewarded, rather than by share ownership per se.

Question 9

Which of the following would be considered an advantage of a group scheme?
A) Equity among employees
B) Rewarding only good performers
C) Competitiveness between employees
D) Individual identification

Accepted Answer

A group scheme promotes equity among employees by providing similar benefits and rewards for all members of the group. This can help to reduce feelings of resentment or unfairness among employees and promote a sense of unity and teamwork. Rewarding only good performers (B) would not be considered an advantage of a group scheme, as it could create competition and division within the group. Similarly, competitiveness between employees (C) is not a desirable outcome of a group scheme, as it can lead to conflicts and a focus on personal gain rather than collective goals. Individual identification (D) is also not an advantage of a group scheme, as the goal is to promote a sense of unity and common purpose among members of the group.

Question 10

Braham Farms has a return on investment of 15 per cent. A Braham division, which currently has a return on investment of 13 per cent and $375 000 of residual income, is contemplating a large investment that will (1) reduce divisional return on investment and (2) produce residual income of $60 000. If Braham strives for goal congruence, the investment:
A) should not be approved because it reduces divisional return on investment.
B) should not be approved because the division's return on investment is less than the corporate return on investment before the investment is considered.
C) should be approved because it produces $60 000 residual income for the division.
D) should be approved because, after acquisition, the division's return on investment and residual income are both positive numbers.

Accepted Answer

Residual income is a measure of absolute profit in dollars, unlike ROI which is a percentage measure of profit relative to investment. If an investment increases the residual income, it means the division is generating more absolute profit, aligning with the goal of maximizing overall company profit, hence supporting goal congruence. The reduction in ROI is less relevant in this context since the absolute dollar profit (residual income) is increasing.

Question 11

Jasmine Dimm is a call centre manager for Tostra, a mobile phone company. Call centre operators at her call centre are responsible for making sales calls to customers to promote Tostra's new products. Jasmine sets two performance targets for her operators: sales and average call duration. Every 6 months, any call centre operator who can achieve both targets goes into a random draw with a one-in-ten chance of winning a $50 supermarket giftcard.
All her call centre operators agree that these two targets are clearly specified, objectively measured and achievable with hard work. However, the call centre operators are still unhappy with the new incentive system. According to the expectancy theory, this is because:
A) the incentive system lacks valence and instrumentality.
B) the incentive system lacks expectancy.
C) the incentive system lacks expectancy and valence.
D) the incentive system lacks expectancy and instrumentality.

Accepted Answer

The incentive system lacks valence and instrumentality because the reward (a $50 supermarket giftcard) may not be valued highly by all employees (valence), and the link between achieving the targets and receiving a meaningful reward (instrumentality) is weakened by the random draw, making it uncertain if effort will lead to the desired reward.

Question 12

Value-based management refers to:
A) a framework for applying EVA to all business decisions.
B) a framework for making key business decisions that add economic value to the business.
C) a philosophy that management should focus on creating customer value.
D) a valuation technique that uses discounted cash flows to estimate imputed cost of capital.

Accepted Answer

Value-based management involves making decisions that add economic value to the business. This may involve using various financial metrics such as economic value added (EVA), but the ultimate goal is to increase the overall value of the business. While creating customer value is an important aspect of business, it is not the sole focus of value-based management. Discounted cash flow analysis is a valuation technique that may be used to inform value-based management decisions, but it is not the same as value-based management itself.

Question 13

A group-based reward system is appropriate when:
i. team work is important and employees need to work together to achieve organisational goals.
ii. it is easy to see individual's effort and performance.
Iii it is important to discriminate between good performers and bad performers.
A) i
B) i and ii
C) i and iii
D) ii and iii

Accepted Answer

Group-based reward systems are most effective when teamwork is essential for achieving organizational goals, as they encourage collaboration and collective effort. Individual effort and performance visibility, as well as discriminating between good and bad performers, are more relevant to individual-based reward systems.

Question 14

Providing an employee incentive scheme that offers more frequent and timely incentives will:
A) discourage employees from making performance targets.
B) continually motivate employees.
C) not impact on an employee's performance.
D) provide no indication of an employee's target achievements.

Accepted Answer

Offering more frequent and timely incentives will continually motivate employees as they will receive recognition and rewards for their achievements more often. This can lead to increased motivation and productivity, as employees strive to earn these incentives on a regular basis.

Question 15

Jasmine Dimm is a call centre manager for Tostra, a mobile phone company. Call centre operators at her call centre are responsible for answering calls from Tostra customers. Some calls are very short, relating to simple enquiries. However, a majority of calls tend to be longer, coming from irate customers complaining about Tostra's services. For these calls, customers are often very emotional and sometimes even abusive. The call centre operators are only responsible for documenting the complaints and are generally unable to solve the problems for the customers.
Jasmine has developed a new reward system for her call centre staff. Under the new system, call centre operators are rewarded with a substantial bonus (20 per cent of annual salary) if they achieve two performance targets: (1) a target set on average call duration; and (2) a target based on 'customer service quality'. While the call centre operators working for Jasmine all agree that these performance targets are reasonable, they are unhappy with Jasmine's overbearing personality. Many operators are also experiencing a lot of stress when dealing with rude customers.
Discuss the limitations of Jasmine's new reward system, using the concept of intrinsic motivation and extrinsic motivation.

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Question 16

Which of the following is a key difference between EVA and residual income?
A) The weighted average cost of capital is used to calculate EVA, but not necessarily for residual income.
B) Net profit is used to calculate residual income but is irrelevant for EVA.
C) EVA has a long term focus, but residual income has a short term focus.
D) There is no difference between EVA and residual income.

Accepted Answer

The weighted average cost of capital (WACC) is a key component in the calculation of EVA, as it reflects the cost of capital for a company's investments. Residual income, on the other hand, does not necessarily require the use of WACC in its calculation. This is because residual income is calculated by subtracting a company's equity charge (based on its cost of equity) from its net income, meaning that it does not take into account the cost of debt or other forms of capital.

Question 17

Under a deferred payment incentive schemes managers are likely to:
A) maximise short-term profit.
B) focus on short-term plans.
C) maximise medium and long-term profits.
D) strive for short-term performance.

Accepted Answer

Deferred payment incentive schemes encourage managers to focus on achieving sustainable financial results in the medium to long term, rather than short-term gains. This is because the deferred payment encourages them to consider the impact of their decisions on company profitability in future years, as their bonus payments will be tied to the company's continued success over that period. Therefore, managers are likely to strive for maximising medium and long-term profits.

Question 18

Which of the following information is required to compute SVA (shareholder value added)?
i. PV of cash flows from operations for a certain time period
Ii Residual value of the business
Iii EVA (economic value added)
A) i and ii
B) i and iii
C) i, ii and iii
D) i

Accepted Answer

To compute Shareholder Value Added (SVA), you need the present value (PV) of cash flows from operations for a certain time period and the residual value of the business. EVA (Economic Value Added) is a different metric and is not required for calculating SVA.

Question 19

The following information is available for Nettie Ltd: 
The company tax rate is 30 per cent. WACC is:
A) 11.2%
B) 10%
C) 7.8%
D) 9.5%

Accepted Answer

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Question 20

Identify and describe two advantages and two limitations of using return on investment (ROI) to evaluate the performance of investment centres.

Accepted Answer

The answer of Identify and describe two advantages and two...

Quiz 13: Financial Performance Measures and Incentive Schemes

When employees feel that they have made a significant achievement in reaching the purpose of the task they are working on, this has been identified (Robbins et al., 2004; Thomas, 2000) as:

Value-based management (VBM) is a framework for making key decisions that add economic value to the business. Morin & Jarrell (2001) identified four aspects of VBM. Identify these four aspects and in your own words outline how these aspects assist managers in their decision making.

The following information is available for Jittie Ltd: The WACC for Jittie Ltd is:

Discuss three ways that the problems associated with using Return on Investment (ROI) can be minimised.

When employees have the opportunity in the larger scheme of things, to pursue a task that they consider worthy, this has been identified (Robbins et al., 2004; Thomas, 2000) as:

Which of the following statements about developing reward system is incorrect?

Which of the following would be considered an advantage of a group scheme?

Value-based management refers to:

A group-based reward system is appropriate when: i. team work is important and employees need to work together to achieve organisational goals. ii. it is easy to see individual's effort and performance. Iii it is important to discriminate between good performers and bad performers.

Providing an employee incentive scheme that offers more frequent and timely incentives will:

Which of the following is a key difference between EVA and residual income?

Under a deferred payment incentive schemes managers are likely to:

Which of the following information is required to compute SVA (shareholder value added) ? i. PV of cash flows from operations for a certain time period Ii Residual value of the business Iii EVA (economic value added)

The following information is available for Nettie Ltd: The company tax rate is 30 per cent. WACC is:

Identify and describe two advantages and two limitations of using return on investment (ROI) to evaluate the performance of investment centres.