Deck 23: Performance Measurement, compensation, and Multinational Considerations
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Deck 23: Performance Measurement, compensation, and Multinational Considerations
1
Managers usually use the return on investment to evaluate ________.
A) the performance of a subdivision
B) the accounting principles followed
C) the size of the investment
D) the balance of working capital
A) the performance of a subdivision
B) the accounting principles followed
C) the size of the investment
D) the balance of working capital
A
2
Assume you are evaluating a manufacturing company.Match the various organizational activities and concepts with the performance measures listed.Some items may have more than one match.
Activities:
Performance measure:

Activities:



3
An example of a performance measure with a long time horizon is ________.
A) direct materials efficiency variances
B) overhead spending variances
C) number of new patents developed
D) quality of room service
A) direct materials efficiency variances
B) overhead spending variances
C) number of new patents developed
D) quality of room service
C
4
The return on investment is usually considered the most popular approach to measure performance because ________.
A) it blends all the ingredients of profitability into a single percentage
B) once determined, there is no need to use it with other measures of performance
C) it throws light on the company's working capital
D) it measures the cash balance of the company in the most efficient manner
A) it blends all the ingredients of profitability into a single percentage
B) once determined, there is no need to use it with other measures of performance
C) it throws light on the company's working capital
D) it measures the cash balance of the company in the most efficient manner
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5
A report that measures financial and nonfinancial performance measures for various organization units in a single report is called a(n)________.
A) balanced scorecard
B) financial report scorecard
C) goal-congruence report
D) investment success report
A) balanced scorecard
B) financial report scorecard
C) goal-congruence report
D) investment success report
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6
Customer-satisfaction measures are an example of the ________.
A) goal-congruence approach
B) balanced scorecard approach
C) financial report scorecard approach
D) investment success approach
A) goal-congruence approach
B) balanced scorecard approach
C) financial report scorecard approach
D) investment success approach
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7
The balanced scorecard in most organizations is broken down into the following categories: commercial perspective,supplier perspective,external business-process perspective,and productivity perspective.
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8
Which of the following steps in designing an accounting-based performance measure includes decisions of selecting net income as a measure of financial performance?
A) choosing performance measures that align with the firm's financial goals
B) choosing the time horizon of each performance measure
C) choosing the details for each performance measure
D) choosing a target level of performance
A) choosing performance measures that align with the firm's financial goals
B) choosing the time horizon of each performance measure
C) choosing the details for each performance measure
D) choosing a target level of performance
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9
Companies are increasingly using nonfinancial measures to evaluate performance.Why? Since these numbers do not come from the company's financial records,why are they used?
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10
Many common performance measures,such as customer satisfaction,rely on internal financial accounting information.
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11
Some companies present financial and nonfinancial performance measures for various organization units in a single report called the balanced scorecard.
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12
Which of the following is true about designing an accounting-based performance measure?
A) The decisions made in steps are followed in a hierarchial order.
B) The issues considered in each step are independent.
C) Management's beliefs are not required during the analyses.
D) Behavioral criteria are important when evaluating the steps.
A) The decisions made in steps are followed in a hierarchial order.
B) The issues considered in each step are independent.
C) Management's beliefs are not required during the analyses.
D) Behavioral criteria are important when evaluating the steps.
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13
When designing the steps in accounting-based performance measures,should the decisions in these steps be sequential?
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14
The ________ method of profitability analysis recognizes the two basic ingredients in profit-making: increasing income per dollar of revenues and using assets to generate more revenues.
A) Balanced Scorecard
B) Residual-Income
C) DuPont
D) Economic Value Added
A) Balanced Scorecard
B) Residual-Income
C) DuPont
D) Economic Value Added
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15
Return on investment can be increased by ________.
A) increasing current assets
B) decreasing total assets
C) decreasing revenues
D) increasing the debt portion of the capital
A) increasing current assets
B) decreasing total assets
C) decreasing revenues
D) increasing the debt portion of the capital
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16
Average number of repeat visits in a spa unit is a ________ measure on a balanced scorecard.
A) customer perspective
B) financial perspective
C) learning-and-growth perspective
D) internal-business-process perspective
A) customer perspective
B) financial perspective
C) learning-and-growth perspective
D) internal-business-process perspective
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17
Make a list of steps of designing an accounting based performance measure.Give example of decisions taken under each step.
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18
Aaron Corp's net income is $25,000.What is the amount of the investment if the return on investment is 20%?
A) $50,000
B) $100,000
C) $125,000
D) $250,000
A) $50,000
B) $100,000
C) $125,000
D) $250,000
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19
Which of the following steps in designing an accounting-based performance measure includes decisions such as defining assets as total assets or net assets in the calculation of return on assets?
A) choosing performance measures that align with top management's financial goals
B) choosing the time horizon of each performance measure
C) choosing the details for each performance measure
D) choosing a target level of performance
A) choosing performance measures that align with top management's financial goals
B) choosing the time horizon of each performance measure
C) choosing the details for each performance measure
D) choosing a target level of performance
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20
The first step in designing accounting based performance measures is to choose a target level of performance and feedback mechanism.
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21
Answer the following questions using the information below:
The Cybertronics Corporation reported the following information for its Cyclotron Division:
Income is defined as operating income.
-What is the Cyclotron Division's return on sales?
A) 20%
B) 40%
C) 50%
D) 60%
The Cybertronics Corporation reported the following information for its Cyclotron Division:
Income is defined as operating income.
-What is the Cyclotron Division's return on sales?
A) 20%
B) 40%
C) 50%
D) 60%
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22
Aeralia Inc.,has two regional offices.The data for each are as follows: What is the Maryland Division's return on investment?
A) 40%
B) 54%
C) 12%
D) 3.57%
A) 40%
B) 54%
C) 12%
D) 3.57%
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23
Zenith Corporation's net income is $78,400.What is the return on investment if the amount of the investment is $500,000?
A) 14.88%
B) 12.78%
C) 15.68%
D) 16%
A) 14.88%
B) 12.78%
C) 15.68%
D) 16%
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24
Answer the following questions using the information below:
The top management at Groundsource Company, a manufacturer of lawn and garden equipment, is attempting to recover from a fire that destroyed some of their accounting records. The main computer system was also severely damaged. The following information was salvaged:
-What is the Digger Division's return on investment?
A) .25
B) .30
C) .45
D) .60
The top management at Groundsource Company, a manufacturer of lawn and garden equipment, is attempting to recover from a fire that destroyed some of their accounting records. The main computer system was also severely damaged. The following information was salvaged:
-What is the Digger Division's return on investment?
A) .25
B) .30
C) .45
D) .60
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25
Answer the following questions using the information below:
The top management at Amore Corp, a manufacturer of computer games, is attempting to recover from a flood that destroyed some of their accounting records. The main computer system was also severely damaged. The following information was salvaged:
-What is the Gamma Division's return on investment (d)?
A) 0.25
B) 0.45
C) 0.60
D) 0.75
The top management at Amore Corp, a manufacturer of computer games, is attempting to recover from a flood that destroyed some of their accounting records. The main computer system was also severely damaged. The following information was salvaged:
-What is the Gamma Division's return on investment (d)?
A) 0.25
B) 0.45
C) 0.60
D) 0.75
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26
Answer the following questions using the information below:
The top management at Amore Corp, a manufacturer of computer games, is attempting to recover from a flood that destroyed some of their accounting records. The main computer system was also severely damaged. The following information was salvaged:
-What were the sales for the Beta Division (a)?
A) $8,666,667
B) $11,904,760
C) $11,000,000
D) $14,303,600
The top management at Amore Corp, a manufacturer of computer games, is attempting to recover from a flood that destroyed some of their accounting records. The main computer system was also severely damaged. The following information was salvaged:
-What were the sales for the Beta Division (a)?
A) $8,666,667
B) $11,904,760
C) $11,000,000
D) $14,303,600
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27
Answer the following questions using the information below:
The top management at Amore Corp, a manufacturer of computer games, is attempting to recover from a flood that destroyed some of their accounting records. The main computer system was also severely damaged. The following information was salvaged:
-What is the value of the operating assets belonging to the Beta Division (c)?
A) $7,333,333
B) $11,904,760
C) $8,333,333
D) $14,303,600
The top management at Amore Corp, a manufacturer of computer games, is attempting to recover from a flood that destroyed some of their accounting records. The main computer system was also severely damaged. The following information was salvaged:
-What is the value of the operating assets belonging to the Beta Division (c)?
A) $7,333,333
B) $11,904,760
C) $8,333,333
D) $14,303,600
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28
Bouvous Corporation had the following information for 2015: What is the return on investment?
A) 10%
B) 20%
C) 25%
D) 18.2%
A) 10%
B) 20%
C) 25%
D) 18.2%
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29
Answer the following questions using the information below:
The top management at Groundsource Company, a manufacturer of lawn and garden equipment, is attempting to recover from a fire that destroyed some of their accounting records. The main computer system was also severely damaged. The following information was salvaged:
-What is the Tractor Division's investment turnover?
A).50
B) 1.0
C) 2.0
D) 2.5
The top management at Groundsource Company, a manufacturer of lawn and garden equipment, is attempting to recover from a fire that destroyed some of their accounting records. The main computer system was also severely damaged. The following information was salvaged:
-What is the Tractor Division's investment turnover?
A).50
B) 1.0
C) 2.0
D) 2.5
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30
Answer the following questions using the information below:
The Cybertronics Corporation reported the following information for its Cyclotron Division:
Income is defined as operating income.
-What is the Cyclotron Division's return on investment?
A) 35%
B) 75%
C) 50%
D) 80%
The Cybertronics Corporation reported the following information for its Cyclotron Division:
Income is defined as operating income.
-What is the Cyclotron Division's return on investment?
A) 35%
B) 75%
C) 50%
D) 80%
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31
Answer the following questions using the information below:
The top management at Amore Corp, a manufacturer of computer games, is attempting to recover from a flood that destroyed some of their accounting records. The main computer system was also severely damaged. The following information was salvaged:
-What is the Alpha Division's return on sales (e)?
A) 60%
B) 65%
C) 63.64%
D) 53.63%
The top management at Amore Corp, a manufacturer of computer games, is attempting to recover from a flood that destroyed some of their accounting records. The main computer system was also severely damaged. The following information was salvaged:
-What is the Alpha Division's return on sales (e)?
A) 60%
B) 65%
C) 63.64%
D) 53.63%
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32
Answer the following questions using the information below:
The top management at Groundsource Company, a manufacturer of lawn and garden equipment, is attempting to recover from a fire that destroyed some of their accounting records. The main computer system was also severely damaged. The following information was salvaged:
-What is the value of the operating assets belonging to the Tiller Division?
A) $ 10,000,000
B) $ 12,000,000
C) $ 14,400,000
D) $ 15,000,000
The top management at Groundsource Company, a manufacturer of lawn and garden equipment, is attempting to recover from a fire that destroyed some of their accounting records. The main computer system was also severely damaged. The following information was salvaged:
-What is the value of the operating assets belonging to the Tiller Division?
A) $ 10,000,000
B) $ 12,000,000
C) $ 14,400,000
D) $ 15,000,000
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33
Answer the following questions using the information below:
The Cybertronics Corporation reported the following information for its Cyclotron Division:
Income is defined as operating income.
-What is the Cyclotron Division's investment turnover ratio?
A) 2.00
B) 3.33
C) 2.50
D) 0.80
The Cybertronics Corporation reported the following information for its Cyclotron Division:
Income is defined as operating income.
-What is the Cyclotron Division's investment turnover ratio?
A) 2.00
B) 3.33
C) 2.50
D) 0.80
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34
The weighted-average cost of capital (WACC)equals ________.
A) the after-tax average cost of all the long-term and short-term funds
B) the after-tax average cost of all the long-term funds
C) the pre-tax average cost of all the short-term funds
D) the pre-tax average cost of all the long-term and short-term funds
A) the after-tax average cost of all the long-term and short-term funds
B) the after-tax average cost of all the long-term funds
C) the pre-tax average cost of all the short-term funds
D) the pre-tax average cost of all the long-term and short-term funds
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35
Answer the following questions using the information below:
The top management at Groundsource Company, a manufacturer of lawn and garden equipment, is attempting to recover from a fire that destroyed some of their accounting records. The main computer system was also severely damaged. The following information was salvaged:
-What is the Tractor Division's return on sales?
A) 0.10
B) 0.12
C) 0.15
D) 0.20
The top management at Groundsource Company, a manufacturer of lawn and garden equipment, is attempting to recover from a fire that destroyed some of their accounting records. The main computer system was also severely damaged. The following information was salvaged:
-What is the Tractor Division's return on sales?
A) 0.10
B) 0.12
C) 0.15
D) 0.20
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36
Answer the following questions using the information below:
The top management at Groundsource Company, a manufacturer of lawn and garden equipment, is attempting to recover from a fire that destroyed some of their accounting records. The main computer system was also severely damaged. The following information was salvaged:
-What were the sales for the Tiller Division?
A) $9,600,000
B) $12,000,000
C) $15,000,000
D) $15,500,000
The top management at Groundsource Company, a manufacturer of lawn and garden equipment, is attempting to recover from a fire that destroyed some of their accounting records. The main computer system was also severely damaged. The following information was salvaged:
-What were the sales for the Tiller Division?
A) $9,600,000
B) $12,000,000
C) $15,000,000
D) $15,500,000
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37
Answer the following questions using the information below:
The top management at Groundsource Company, a manufacturer of lawn and garden equipment, is attempting to recover from a fire that destroyed some of their accounting records. The main computer system was also severely damaged. The following information was salvaged:
-What is the value of the operating assets belonging to the Tractor Division?
A) $ 3,500,000
B) $4,000,000
C) $4,500,000
D) $5,000,000
The top management at Groundsource Company, a manufacturer of lawn and garden equipment, is attempting to recover from a fire that destroyed some of their accounting records. The main computer system was also severely damaged. The following information was salvaged:
-What is the value of the operating assets belonging to the Tractor Division?
A) $ 3,500,000
B) $4,000,000
C) $4,500,000
D) $5,000,000
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38
Answer the following questions using the information below:
The top management at Amore Corp, a manufacturer of computer games, is attempting to recover from a flood that destroyed some of their accounting records. The main computer system was also severely damaged. The following information was salvaged:
-What is the value of the operating assets belonging to the Alpha Division (b)?
A) $8,666,667
B) $14,000,000
C) $13,000,000
D) $14,303,600
The top management at Amore Corp, a manufacturer of computer games, is attempting to recover from a flood that destroyed some of their accounting records. The main computer system was also severely damaged. The following information was salvaged:
-What is the value of the operating assets belonging to the Alpha Division (b)?
A) $8,666,667
B) $14,000,000
C) $13,000,000
D) $14,303,600
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39
Answer the following questions using the information below:
The top management at Groundsource Company, a manufacturer of lawn and garden equipment, is attempting to recover from a fire that destroyed some of their accounting records. The main computer system was also severely damaged. The following information was salvaged:
-What is the Tiller Division's investment turnover?
A) .50
B) .833
C) 1.2
D) 1.5
The top management at Groundsource Company, a manufacturer of lawn and garden equipment, is attempting to recover from a fire that destroyed some of their accounting records. The main computer system was also severely damaged. The following information was salvaged:
-What is the Tiller Division's investment turnover?
A) .50
B) .833
C) 1.2
D) 1.5
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40
Bouvous Corp has two regional offices.The data for each are as follows: What is the return on investment for the New Jersey Division?
A) 21%
B) 33.33%
C) 66.67%
D) 25%
A) 21%
B) 33.33%
C) 66.67%
D) 25%
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41
Answer the following questions using the information below:
Care Inc., has two divisions that operate independently of one another. The financial data for the year 2015 reported the following results:
The company's desired rate of return is 10%. Income is defined as operating income.
-What are the respective residual incomes for the North and South Divisions?
A) $60,000 and $100,000
B) $300,000 and $60,000
C) $300,000 and $100,000
D) $100,000 and $200,000
Care Inc., has two divisions that operate independently of one another. The financial data for the year 2015 reported the following results:
The company's desired rate of return is 10%. Income is defined as operating income.
-What are the respective residual incomes for the North and South Divisions?
A) $60,000 and $100,000
B) $300,000 and $60,000
C) $300,000 and $100,000
D) $100,000 and $200,000
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42
Times Corporation,whose tax rate is 40%,has two sources of funds: long-term debt with a market value of $6,000,000 and an interest rate of 9%,and equity capital with a market value of $18,000,000 and a cost of equity of 11%.Times Corporation's after-tax cost of debt is ________.
A) 3.40%
B) 5.40%
C) 5.00%
D) 7.40%
A) 3.40%
B) 5.40%
C) 5.00%
D) 7.40%
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43
Economic value added is equal to ________.
A) After-tax operating income - [Weighted-average cost of capital + (Total assets - Current liabilities)]
B) Pre-tax operating income - [Weighted-average cost of capital + (Total assets - Current liabilities)]
C) After-tax operating income - [Weighted-average cost of capital × (Total assets - Current liabilities)]
D) Pre-tax operating income - [Weighted-average cost of capital × (Total assets - Current liabilities)]
A) After-tax operating income - [Weighted-average cost of capital + (Total assets - Current liabilities)]
B) Pre-tax operating income - [Weighted-average cost of capital + (Total assets - Current liabilities)]
C) After-tax operating income - [Weighted-average cost of capital × (Total assets - Current liabilities)]
D) Pre-tax operating income - [Weighted-average cost of capital × (Total assets - Current liabilities)]
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44
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%.
-What is the EVA for Bish Bash Falls?
A) $338,563
B) $305,000
C) $275,500
D) $255,500
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%.
-What is the EVA for Bish Bash Falls?
A) $338,563
B) $305,000
C) $275,500
D) $255,500
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45
Stonex Corp,whose tax rate is 40%,has two sources of funds: long-term debt with a market value of $6,000,000 and an interest rate of 8%,and equity capital with a market value of $14,000,000 and a cost of equity of 12%.Stonex has two operating divisions,the Blue division and the Gold division,with the following financial measures for the current year: Calculate EVA for the Gold Division.
A) ($57,640)
B) ($27,840)
C) ($37,340)
D) $397,440
A) ($57,640)
B) ($27,840)
C) ($37,340)
D) $397,440
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46
Return on investment is also known as the ________.
A) net present value
B) accounting rate of return
C) residual income
D) economic value added
A) net present value
B) accounting rate of return
C) residual income
D) economic value added
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47
The after-tax average cost of all the long-term funds used by a corporation equals ________.
A) economic value added
B) cost of goodwill
C) interest cost of the capital
D) weighted-average cost of capital
A) economic value added
B) cost of goodwill
C) interest cost of the capital
D) weighted-average cost of capital
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48
Using residual income as a measure of performance rather than return on investment promotes goal congruence because residual income ________.
A) places importance on the reduction of underperforming assets
B) calculates a percentage return rather than an absolute return
C) concentrates on maximizing an absolute amount of dollars
D) concentrates on maximizing the return on sales
A) places importance on the reduction of underperforming assets
B) calculates a percentage return rather than an absolute return
C) concentrates on maximizing an absolute amount of dollars
D) concentrates on maximizing the return on sales
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49
Springfield Corporation,whose tax rate is 30%,has two sources of funds: long-term debt with a market value of $6,000,000 and an interest rate of 8%,and equity capital with a market value of $15,000,000 and a cost of equity of 12%.What is Springfield's weighted average cost of capital (WACC)?
A) 9.17%
B) 9.57%
C) 10.17%
D) 11.17%
A) 9.17%
B) 9.57%
C) 10.17%
D) 11.17%
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50
Springfield Corporation,whose tax rate is 40%,has two sources of funds: long-term debt with a market value of $8,000,000 and an interest rate of 8%,and equity capital with a market value of $12,000,000 and a cost of equity of 12%.Springfield has two operating divisions,the Blue division and the Gold division,with the following financial measures for the current year:
What is Economic Value Added (EVA)for the Blue Division?
A) -$233,400
B) $21,960
C) $188,600
D) $433,960
What is Economic Value Added (EVA)for the Blue Division?
A) -$233,400
B) $21,960
C) $188,600
D) $433,960
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51
Answer the following questions using the information below:
Waldorf Company has two sources of funds: long-term debt with a market and book value of $5 million issued at an interest rate of 12%, and equity capital that has a market value of $4 million (book value of $2 million). Waldorf Company has profit centers in the following locations with the following operating incomes, total assets, and current liabilities. The cost of equity capital is 12%, while the tax rate is 25%.
-What is the EVA for Wichita?
A) $225,000
B) $765,000
C) $207,180
D) $557,820
Waldorf Company has two sources of funds: long-term debt with a market and book value of $5 million issued at an interest rate of 12%, and equity capital that has a market value of $4 million (book value of $2 million). Waldorf Company has profit centers in the following locations with the following operating incomes, total assets, and current liabilities. The cost of equity capital is 12%, while the tax rate is 25%.
-What is the EVA for Wichita?
A) $225,000
B) $765,000
C) $207,180
D) $557,820
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52
Which of the following is a performance measure?
A) retained earnings
B) market value
C) present value of cash flows
D) economic value added
A) retained earnings
B) market value
C) present value of cash flows
D) economic value added
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53
Answer the following questions using the information below:
Care Inc., has two divisions that operate independently of one another. The financial data for the year 2015 reported the following results:
The company's desired rate of return is 10%. Income is defined as operating income.
-Which division has the best return on investment and which division has the best residual income figure,respectively?
A) North, North
B) South, South
C) North, South
D) South, North
Care Inc., has two divisions that operate independently of one another. The financial data for the year 2015 reported the following results:
The company's desired rate of return is 10%. Income is defined as operating income.
-Which division has the best return on investment and which division has the best residual income figure,respectively?
A) North, North
B) South, South
C) North, South
D) South, North
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54
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%.
-What is the EVA for Brooksville?
A) $476,250
B) $428,000
C) $415,525
D) $390,000
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%.
-What is the EVA for Brooksville?
A) $476,250
B) $428,000
C) $415,525
D) $390,000
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55
The required rate of return multiplied by the investment is the ________.
A) sunk cost of the investment
B) historical cost of the investment
C) imputed cost of the investment
D) return on sales
A) sunk cost of the investment
B) historical cost of the investment
C) imputed cost of the investment
D) return on sales
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56
Which of the following satisfies the DuPont method of profitability analysis?
A) Income / Investment = Income / Total costs + Revenues / Equity
B) Income / Investment = Income / Revenues + Revenues / Investment
C) Income / Investment = Income / Revenues × Revenues / Investment
D) Income / Investment = Income / Total costs × Revenues / Equity
A) Income / Investment = Income / Total costs + Revenues / Equity
B) Income / Investment = Income / Revenues + Revenues / Investment
C) Income / Investment = Income / Revenues × Revenues / Investment
D) Income / Investment = Income / Total costs × Revenues / Equity
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57
Answer the following questions using the information below:
Care Inc., has two divisions that operate independently of one another. The financial data for the year 2015 reported the following results:
The company's desired rate of return is 10%. Income is defined as operating income.
-What are the respective return-on-investment ratios for the North and South Divisions?
A) 10.00% and 15.00%
B) 11.71% and 14.00%
C) 10.71% and 12.00%
D) 12.50% and 15.00%
Care Inc., has two divisions that operate independently of one another. The financial data for the year 2015 reported the following results:
The company's desired rate of return is 10%. Income is defined as operating income.
-What are the respective return-on-investment ratios for the North and South Divisions?
A) 10.00% and 15.00%
B) 11.71% and 14.00%
C) 10.71% and 12.00%
D) 12.50% and 15.00%
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58
Answer the following questions using the information below:
Waldorf Company has two sources of funds: long-term debt with a market and book value of $5 million issued at an interest rate of 12%, and equity capital that has a market value of $4 million (book value of $2 million). Waldorf Company has profit centers in the following locations with the following operating incomes, total assets, and current liabilities. The cost of equity capital is 12%, while the tax rate is 25%.
-What is the EVA for St.Louis?
A) $127,870
B) $163,730
C) $196,270
D) $360,000
Waldorf Company has two sources of funds: long-term debt with a market and book value of $5 million issued at an interest rate of 12%, and equity capital that has a market value of $4 million (book value of $2 million). Waldorf Company has profit centers in the following locations with the following operating incomes, total assets, and current liabilities. The cost of equity capital is 12%, while the tax rate is 25%.
-What is the EVA for St.Louis?
A) $127,870
B) $163,730
C) $196,270
D) $360,000
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59
A company which favors the residual income approach wants managers to ________.
A) concentrate on maximizing an absolute amount of dollars
B) concentrate on maximizing a percentage return
C) maximize the investment turnover ratio
D) maximize return on sales
A) concentrate on maximizing an absolute amount of dollars
B) concentrate on maximizing a percentage return
C) maximize the investment turnover ratio
D) maximize return on sales
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60
Answer the following questions using the information below:
Waldorf Company has two sources of funds: long-term debt with a market and book value of $5 million issued at an interest rate of 12%, and equity capital that has a market value of $4 million (book value of $2 million). Waldorf Company has profit centers in the following locations with the following operating incomes, total assets, and current liabilities. The cost of equity capital is 12%, while the tax rate is 25%.
-What is the EVA for Cedar Rapids?
A) $67,790
B) $110,000
C) $117,000
D) $152,500
Waldorf Company has two sources of funds: long-term debt with a market and book value of $5 million issued at an interest rate of 12%, and equity capital that has a market value of $4 million (book value of $2 million). Waldorf Company has profit centers in the following locations with the following operating incomes, total assets, and current liabilities. The cost of equity capital is 12%, while the tax rate is 25%.
-What is the EVA for Cedar Rapids?
A) $67,790
B) $110,000
C) $117,000
D) $152,500
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61
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.
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62
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.
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63
All other things held constant,increase in assets such as receivables or decrease in operating income results in an increase in return on investment.
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64
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?

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?
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65
Required rate of return multiplied by the investment is the weighted average cost of the investment.
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66
Economic value added,unlike residual income,charges managers for the costs of their investments in long-term assets and working capital.
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67
Historical costs are costs recognized in particular situations that are not usually recognized by accrual accounting procedures.
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68
Reducing the investment base involves decreasing idle cash,managing credit judiciously,determining proper inventory levels,and spending carefully on long-term assets.
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69
Return on sales measures how effectively costs are managed.
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70
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.
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71
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
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72
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?

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?
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73
To evaluate overall aggregate performance,return on investment and residual income measures are more appropriate than return on sales.
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74
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.
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75
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%.
-What is the EVA for Stonybrook?
A) $1,108,000
B) $1,168,700
C) $1,315,063
D) $1,403,063
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%.
-What is the EVA for Stonybrook?
A) $1,108,000
B) $1,168,700
C) $1,315,063
D) $1,403,063
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76
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.

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.
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77
In an EVA calculation,the appropriate measure of a division's profit would be that division's pre-tax operating income.
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78
Return on investment is an accounting measure of income minus a dollar amount for required return on an accounting measure of investment.
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79
Companies that adopt the EVA concept define investment as total assets employed minus current liabilities.
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80
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.
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