Question 1

Sunrise Corporation has a return on investment of 15%.A Sunrise division,which currently has a 13% ROI and $750,000 of residual income,is contemplating a massive new investment that will (1)reduce divisional ROI and (2)produce $120,000 of residual income.If Sunrise strives for goal congruence,the investment:

Accepted Answer

The investment should be acquired because it produces $120,000 of residual income for the division. Although the divisional ROI will decrease, the investment will still add to the division's residual income and contribute to overall corporate profitability. As long as the division's ROI and residual income remain positive, the investment is in line with the goal of maximizing corporate profitability.

Question 2

The Fitzhugh Division of General Enterprises has a negative residual income of $540,000.Fitzhugh's management is contemplating an investment opportunity that will reduce this negative amount to $400,000.The investment:

Accepted Answer

The investment should be pursued because it is attractive from both the divisional and corporate perspectives. The negative residual income will be reduced, which is a positive for both the division and the corporation.

Question 3

The ROI is:

Accepted Answer

Without more information on the context of the question, the ROI value alone cannot determine the best choice. However, in general, a higher ROI is considered better as it means the investment generated more profit relative to its cost. Therefore, among the given options, the best choice would be C)20% as it has the highest ROI.

Question 4

The Magellan Division of Global Corporation,which has income of $250,000 and an asset investment of $1,562,500,is studying an investment opportunity that will cost $450,000 and yield a profit of $67,500.Assuming that Global uses an imputed interest charge of 14%,would the investment be attractive to:
1-Divisional management if ROI is used to evaluate divisional performance?
2-Divisional management if residual income (RI)is used to evaluate divisional performance?
3-The management of Global Corporation?

Accepted Answer

The answer of The Magellan Division of Global Corporation,which has...

Question 5

For the period just ended,United Corporation's Delta Division reported profit of $31.9 million and invested capital of $220 million.Assuming an imputed interest rate of 12%,which of the following choices correctly denotes Delta's return on investment (ROI)and residual income?

Accepted Answer

The answer of For the period just ended,United Corporation's Delta...

Question 6

Excel Division reported a residual income of $200,000 for the year just ended.The division had $8,000,000 of invested capital and $1,000,000 of income.On the basis of this information,the imputed interest rate was:

Accepted Answer

Residual income is calculated as actual income minus the product of the invested capital and the imputed interest rate. Given the residual income of $200,000, actual income of $1,000,000, and invested capital of $8,000,000, the equation is: $1,000,000 - ($8,000,000 * r) = $200,000. Solving for r gives an imputed interest rate of 10.0%.

Question 7

For the period just ended,Techno Corporation's Stocker Division reported profit of $54 million and invested capital of $450 million.Assuming an imputed interest rate of 10%,which of the following choices correctly denotes Stocker's return on investment (ROI)and residual income?

Accepted Answer

The answer of For the period just ended,Techno Corporation's Stocker...

Question 8

The sales margin is:

Accepted Answer

The answer of The sales margin is:
...

Question 9

BFF Corporation uses an imputed interest rate of 13% in the calculation of residual income.Division X,which is part of BFF,had invested capital of $1,200,000 and an ROI of 16%.On the basis of this information,X's residual income was:

Accepted Answer

Residual income is calculated as the operating income minus the imputed interest on invested capital. The imputed interest is 13% of $1,200,000, which is $156,000. The operating income is 16% of $1,200,000, which is $192,000. Therefore, the residual income is $192,000 - $156,000 = $36,000.

Question 10

The residual income is:

Accepted Answer

The answer of The residual income is:
...

Question 11

Consider the following statements about residual income:
I.Residual income incorporates a firm's cost of acquiring investment capital.
II.Residual income is a percentage measure,not a dollar measure.
III.If used correctly,residual income may result in division managers making decisions that are in their own best interest and not in the best interest of the entire firm.
Which of the above statements is (are)true?

Accepted Answer

The answer of Consider the following statements about residual income:
I.Residual...

Question 12

Which of the following is used in the calculation of both return on investment and residual income?

Accepted Answer

Both return on investment (ROI) and residual income require the calculation of invested capital, which includes both equity and debt. Therefore, option C, invested capital, is used in the calculation of both ROI and residual income.

Question 13

A division's return on investment may be improved by increasing:

Accepted Answer

The return on investment of a division can be improved by increasing its capital turnover or sales margin. Increasing cost of goods sold and expenses (option A) would decrease the return on investment, while increasing sales revenue alone (option C) does not necessarily guarantee an improvement in ROI if the cost of capital stays the same. Increasing cost of capital (option B) could also decrease the ROI. Therefore, option D (capital turnover or sales margin) is the best choice to improve ROI.

Question 14

Imputed interest can best be described as:

Accepted Answer

Imputed interest is the interest that is considered to be charged on a loan, even if no interest is actually charged. It represents the minimum required rate of return on invested capital, ensuring that all financial transactions are recorded at their fair market value. This concept is often applied in transactions where the interest is not explicitly stated, such as in zero-interest loans between related parties.

Question 15

The Little Rock Division of Classics Companies currently reports a profit of $3.6 million.Divisional invested capital totals $9.5 million;the imputed interest rate is 12%.On the basis of this information,Little Rock's residual income is:

Accepted Answer

The answer of The Little Rock Division of Classics Companies...

Question 16

The basic idea behind residual income is to have a division maximize its:

Accepted Answer

Residual income is a measure of profitability that calculates the net income a company generates above its cost of capital. It is specifically designed to assess the income generated in excess of a minimum required return (a corporate imputed interest charge) on its invested capital.

Question 17

The information that follows relates to Kravitz Corporation:
Sales margin: 7.5%
Capital turnover: 2
Invested capital: $20,000,000
On the basis of this information,the company's sales revenue is:

Accepted Answer

The capital turnover is calculated as Sales Revenue divided by Invested Capital. Given a capital turnover of 2 and invested capital of $20,000,000, the sales revenue is $20,000,000 * 2 = $40,000,000.

Question 18

All of the following actions are likely to increase ROI except:

Accepted Answer

A decrease in the number of units sold would result in a decrease in sales revenues and therefore decrease the ROI. All the other options would either increase sales revenues or decrease operating expenses, which would increase the ROI.

Question 19

The following information relates to the Cliff Division of Mountain Enterprises:
Income for the period just ended: $1,500,000
Invested capital: $12,000,000
If the company has an imputed interest rate of 11%,Cliff's residual income would be:

Accepted Answer

Residual income is calculated as the income minus the imputed interest on invested capital. The imputed interest is 11% of $12,000,000, which is $1,320,000. Therefore, the residual income is $1,500,000 - $1,320,000 = $180,000.

Question 20

The capital turnover is:

Accepted Answer

Capital turnover is calculated by dividing the sales or revenues by the total capital (equity + debt). Without specific numbers for sales/revenues and capital, it's impossible to calculate or confirm the exact figure from the options provided. However, since only the choice number is requested and without the specific data to calculate, this response assumes a hypothetical scenario or a test of understanding of what capital turnover signifies rather than solving a specific numerical problem.

Quiz 13: Investment Centers and Transfer Pricing