Question 1

Speedy Ltd has an imputed interest rate of 12 per cent. Division Z of Speedy Ltd has invested capital of $800 000 and a return on investment of 15 per cent. What is the residual income?
A) ($24 000)
B) $24 000
C) $96 000
D) None of the given answers

Accepted Answer

Residual Income = Division's Return on Investment - (Capital Invested x Imputed Interest Rate)
Residual Income = 800,000 x 15% - (800,000 x 12%)
Residual Income = $120,000 - $96,000
Residual Income = $24,000

Therefore, the correct answer is B) $24,000.

Question 2

Which of the following statements is false?
A) Group reward schemes help people identify with the group.
B) Group reward schemes discriminate between good and bad performers.
C) Group reward schemes avoid excessive competition between employees.
D) Group reward schemes may encourage 'freeloaders'.

Accepted Answer

Group reward schemes typically reward the group as a whole rather than distinguishing between the performance of individual members. This means they do not inherently discriminate between good and bad performers, as everyone in the group receives the same reward based on the group's overall performance.

Question 3

Which of the following are, according to Herzberg, motivating factors?
A) Recognition
B) Working conditions
C) Relationships with colleagues
D) Recognition AND working conditions

Accepted Answer

According to Herzberg's two-factor theory, motivating factors are job characteristics that are related to the nature of the work itself, including achievement, recognition, the work itself, responsibility, and advancement. Recognition is one of these motivating factors. Working conditions and relationships with colleagues are examples of hygiene factors, which can prevent dissatisfaction with the job, but do not necessarily lead to motivation or satisfaction.

Question 4

Which of the following is/are an extrinsic reward?
A) Share options
B) Job satisfaction
C) Promotion
D) Share options AND promotion

Accepted Answer

Extrinsic rewards are tangible rewards given by an external party, typically an employer, as recognition for a job well done or to motivate future performance. Share options and promotions are examples of extrinsic rewards because they are tangible benefits provided by the employer. Job satisfaction, on the other hand, is considered an intrinsic reward, as it comes from within the individual based on personal feelings of achievement and fulfillment.

Question 5

Return on investment may be improved by increasing:
A) cost of goods sold and expenses.
B) sales margin and cost of capital.
C) sales revenue and cost of capital.
D) capital turnover or sales margin.

Accepted Answer

Return on investment (ROI) is calculated by dividing net income by the amount of the initial investment. Increasing capital turnover (the amount of revenue generated per dollar of assets) or increasing sales margin (the difference between the selling price and the cost of the product) will both increase net income and therefore improve ROI. Increasing cost of goods sold and expenses will decrease net income and reduce ROI, while increasing sales revenue alone will not necessarily improve ROI without considering the cost of generating that revenue. Therefore, choice D is the best option.

Question 6

Which of the following are value drivers (i.e. create value for the business)?
i. Growth
ii. Sustainability
iii. Spread
iv. Cost of capital
A) i, ii and iii
B) ii, iii and iv
C) i, iii and iv
D) All of the given answers

Accepted Answer

Growth, sustainability, and spread are direct value drivers as they contribute to increasing a business's revenue, ensuring long-term viability, and maintaining profitability margins, respectively. Cost of capital, while not a direct value driver, influences value creation by affecting investment decisions and the overall cost structure, thereby indirectly impacting the business's value.

Question 7

Which of the following is the correct mathematical expression for return on investment?
A) Sales margin $\div$ capital turnover
B) Sales margin - capital turnover
C) Sales margin $\times$ capital turnover
D) Capital turnover $\div$ sales margin

Accepted Answer

Return on investment is calculated by multiplying the sales margin (the difference between revenue and costs) by the capital turnover (the amount of capital used to generate revenue). Therefore, the correct expression is Sales margin x Capital turnover. Option C represents this calculation in a correct manner.

Question 8

Which of the following statements is/are correct?
A) Invested capital is the assets that an investment centre has available to generate profit.
B) When evaluating an investment centre, only the profit is important.
C) Return on investment focuses on how effectively each investment centre has used its investment capital.
D) Invested capital represents the assets that an investment centre has available to generate profit AND return on investment focuses on how effectively each investment centre has used its investment capital.

Accepted Answer

Option D is correct as it combines the definition of invested capital and return on investment, both of which are important factors to consider when evaluating an investment centre. Option A is only a partial definition of an investment centre, as it does not take into account the profitability of those assets. Option B is incorrect because profit alone does not provide a complete picture of an investment centre's performance, and Option C is only half correct as it addresses return on investment but does not provide a definition of invested capital.

Question 9

Given that return on investment measures performance over time, the invested capital would most appropriately be calculated by using:
A) beginning of year assets.
B) average assets.
C) total assets.
D) current assets.

Accepted Answer

Using average assets would provide a more accurate measure of the capital invested over the performance period, as it takes into account any fluctuations in the asset values over time. Beginning of year assets (A) and current assets (D) do not represent the invested capital over the entire period, while total assets (C) may not reflect changes in asset values or additions/removals of assets during the performance period.

Question 10

Shareholder value added may be defined as:
A) corporate value - market value of the company.
B) corporate value - market value of debt.
C) corporate value - present value of liabilities.
D) corporate value - current liabilities.

Accepted Answer

Shareholder value added (SVA) is calculated by subtracting the market value of debt from the corporate value. This represents the value created for shareholders above and beyond what is owed to creditors. Therefore, option B is the correct definition of SVA.

Question 11

All the following actions will increase return on investment except:
A) an increase in sales revenues.
B) a decrease in operating expenses.
C) a decrease in the company's invested capital.
D) a decrease in the number of units sold.

Accepted Answer

Decreasing the number of units sold will decrease sales revenues, leading to a decrease in return on investment. A, B, and C will all increase return on investment.

Question 12

The Extan division of World Corporation reported a residual income of $200 000. The division had $8 million of invested capital and a profit of $1 million. What is the imputed interest rate?
A) 7.5%
B) 10.0%
C) 12.5%
D) 20%

Accepted Answer

Residual income is calculated as profit minus a charge for the use of invested capital. Using the formula: Residual income = Profit - (Invested Capital x Imputed Interest Rate)
$200 000 = $1 000 000 - ($8 000 000 x Imputed Interest Rate)
Imputed Interest Rate = 0.025 = 2.5 or 2.5%
Therefore, the imputed interest rate is 10% (B).

Question 13

Which of the following measures of performance is based, in part, on weighted average cost of capital?
A) Return on investment
B) Capital turnover
C) Return on sales
D) Economic value added

Accepted Answer

Economic value added (EVA) is a measure of financial performance that takes into account the cost of capital. It is calculated as the net operating profit after taxes (NOPAT) minus the weighted average cost of capital (WACC) multiplied by the total invested capital. Therefore, EVA is based, in part, on weighted average cost of capital.

Question 14

White Hills Ltd reported a return on investment of 12 per cent, a capital turnover of 5 and income of $180 000. What was the company's invested capital?
A) $300 000
B) $900 000
C) $1 500 000
D) $7 500 000

Accepted Answer

The answer of White Hills Ltd reported a return on...

Question 15

The following information relates to Black's Mount Ltd: 
What is its economic value added?
A) $120 000
B) $180 000
C) $240 000
D) $292 000

Accepted Answer

The answer of The following information relates to Black's Mount...

Question 16

The northern division of Aussie Estates has reported a profit of $4 million. Divisional invested capital is $2.5 million and the imputed interest rate is 12 per cent. What is the residual income?
A) $180 000
B) $1.78 million
C) $2.15 million
D) $3 700 000

Accepted Answer

The answer of The northern division of Aussie Estates has...

Question 17

The profitability of an investment centre can best be evaluated by:
A) the revenues, costs and investment the manager can control.
B) the total capital invested in the organisation and the sizeable amount of return.
C) the profit margin and the investment capital traceable to the investment centre.
D) the divisional contribution margin.

Accepted Answer

The profitability of an investment centre can best be evaluated by considering the profit margin and the investment capital traceable to the investment centre. This allows for the assessment of the centre's ability to generate profit relative to the capital invested in it. Option A is partially correct but does not account for the investment made. Option B is not accurate since total capital invested may not necessarily correspond to the investment made in the particular centre. Option D is not comprehensive enough as it only considers the contribution margin.

Question 18

Which of the following is/are, according to Herzberg, hygiene factors?
A) Recognition
B) Working conditions
C) Relationships with colleagues
D) Working conditions AND relationships with colleagues

Accepted Answer

According to Herzberg's Two-Factor Theory, hygiene factors are those that do not motivate employees, but their absence can lead to dissatisfaction. This includes factors such as working conditions (e.g. safety, comfort, cleanliness) and relationships with colleagues. Recognition, on the other hand, is a motivator factor, as it can enhance employee satisfaction and motivation. Therefore, options A and C are not hygiene factors.

Question 19

Tentafield Ltd has an after tax operating income of $2.6 million, assets totalling $8 million and current liabilities totalling $400 000. The weighted average cost of capital is 10 per cent. What is the economic value added?
A) $1 400 000
B) $1 800 000
C) $1 840 000
D) None of the given answers

Accepted Answer

First, we need to calculate the total capital of the company:
Total Capital = Assets - Current Liabilities
Total Capital = $8,000,000 - $400,000
Total Capital = $7,600,000

Next, we need to calculate the cost of capital:
Cost of Capital = Total Capital x Weighted Average Cost of Capital (WACC)
Cost of Capital = $7,600,000 x 0.10
Cost of Capital = $760,000

Finally, we can calculate the economic value added (EVA):
EVA = After Tax Operating Income - Cost of Capital
EVA = $2,600,000 - $760,000
EVA = $1,840,000

Therefore, the answer is C) $1,840,000

Question 20

Which of the following strategies may increase economic value added?
A) Increase profit as a percentage of capital employed.
B) Borrow additional funds and invest in assets that earn more than the weighted average cost of capital.
C) Sell off assets that earn more than the weighted average cost of capital.
D) Increase profit as a percentage of capital employed AND borrow additional funds and invest in assets that earn more than the weighted average cost of capital.

Accepted Answer

Increasing profit as a percentage of capital employed and borrowing additional funds to invest in assets that earn more than the weighted average cost of capital both contribute to increasing economic value added. By increasing profit margins, the company is able to generate more profits from the same amount of invested capital, increasing its economic value added. By investing in assets that earn more than the cost of capital, the company is generating excess returns, further increasing its economic value added. Selling off assets that earn more than the weighted average cost of capital may generate a short-term boost to economic value added, but over the long run it may lead to a decrease in overall profitability if those assets were essential to the company's operations.

Quiz 13: Financial Performance Measures and Incentive Schemes

Speedy Ltd has an imputed interest rate of 12 per cent. Division Z of Speedy Ltd has invested capital of $800 000 and a return on investment of 15 per cent. What is the residual income?

Which of the following statements is false?

Which of the following are, according to Herzberg, motivating factors?

Which of the following is/are an extrinsic reward?

Return on investment may be improved by increasing:

Which of the following are value drivers (i.e. create value for the business) ? i. Growth ii. Sustainability iii. Spread iv. Cost of capital

Which of the following is the correct mathematical expression for return on investment?

Which of the following statements is/are correct?

Given that return on investment measures performance over time, the invested capital would most appropriately be calculated by using:

Shareholder value added may be defined as:

All the following actions will increase return on investment except:

The Extan division of World Corporation reported a residual income of $200 000. The division had $8 million of invested capital and a profit of $1 million. What is the imputed interest rate?

Which of the following measures of performance is based, in part, on weighted average cost of capital?

White Hills Ltd reported a return on investment of 12 per cent, a capital turnover of 5 and income of $180 000. What was the company's invested capital?

The following information relates to Black's Mount Ltd: What is its economic value added?

The northern division of Aussie Estates has reported a profit of $4 million. Divisional invested capital is $2.5 million and the imputed interest rate is 12 per cent. What is the residual income?

The profitability of an investment centre can best be evaluated by:

Which of the following is/are, according to Herzberg, hygiene factors?

Tentafield Ltd has an after tax operating income of $2.6 million, assets totalling $8 million and current liabilities totalling $400 000. The weighted average cost of capital is 10 per cent. What is the economic value added?

Which of the following strategies may increase economic value added?