Question 1

Shareholder value added may be defined as:

Accepted Answer

Shareholder value added (SVA) is the difference between the return on investment (ROI) and the cost of capital. It is calculated by subtracting the market value of debt from the corporate value, which gives the equity Value Added (EVA). SVA is a measure of the wealth created by a company for its shareholders. It is an important performance metric for investors and managers. Therefore, option B is the most appropriate definition for shareholder value added.

Question 2

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

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 3

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

Accepted Answer

Economic value added (EVA) is a performance measure that takes into account the weighted average cost of capital (WACC) in determining the profitability of a company. EVA compares the net operating profit after taxes (NOPAT) to the total amount of capital employed, adjusted for the cost of capital. This gives a clearer picture of how much value a company is creating for its investors, as it considers not only the profits generated, but also the cost of financing those profits. A higher EVA indicates better performance, as the company is generating returns that exceed its cost of capital.

Question 4

All the following actions will increase return on investment except:

Accepted Answer

A decrease in the number of units sold would decrease sales revenues, which would in turn decrease return on investment. Therefore, it would not increase return on investment. A, B, and C all have the potential to increase return on investment.

Question 5

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?

Accepted Answer

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

Question 6

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?

Accepted Answer

Residual income = Actual profit - (Imputed interest rate x Invested capital)
$200,000 = $1,000,000 - (Imputed interest rate x $8,000,000)
Imputed interest rate = ($1,000,000 - $200,000) / $8,000,000
Imputed interest rate = 0.1 or 10%

Question 7

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?

Accepted Answer

Residual income is calculated as follows: 
Residual Income = Return on Investment - (Imputed Interest Rate * Invested Capital)
Residual Income = 15% * $800 000 - (12% * $800 000)
Residual Income = $120 000 - $96 000
Residual Income = $24 000
Therefore, the answer is B.

Question 8

Which of the following strategies may increase economic value added?

Accepted Answer

Both 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 can contribute to increasing economic value added. By increasing profit as a percentage of capital employed, the company is able to generate more value from the same amount of capital. Borrowing funds to invest in profitable assets can also generate additional value by earning a return that exceeds the cost of capital. Therefore, both strategies can work together to increase economic value added.

Question 9

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

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 10

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

Accepted Answer

According to Herzberg, motivating factors are those that are inherent to the job itself and are related to the satisfaction or pleasure derived from performing the job. Recognition is one such factor. Working conditions and relationships with colleagues are hygiene factors, which are necessary to prevent dissatisfaction but not sufficient to motivate employees.

Question 11

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

Accepted Answer

Return on investment (ROI) measures the performance of an investment over time by comparing the income (or return) generated by the investment to the cost of the investment. To calculate ROI, the invested capital is used as the denominator. The invested capital is the amount of money invested in the asset, and it's important to use an appropriate measure of invested capital to get an accurate ROI calculation. Average assets are usually the most appropriate measure of invested capital because they account for fluctuations in the asset's value over time. Therefore, using average assets as the denominator gives a more accurate picture of the return on investment over the investment period.

Question 12

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?

Accepted Answer

Economic Value Added (EVA) = After-tax operating income - (Weighted Average Cost of Capital x Total Capital)

Total Capital = Total Assets - Current Liabilities
Total Capital = $8,000,000 - $400,000
Total Capital = $7,600,000

EVA = $2,600,000 - (0.10 x $7,600,000)
EVA = $2,600,000 - $760,000
EVA = $1,840,000

Therefore, the economic value added is $1,840,000, which corresponds to answer choice C.

Question 13

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

Accepted Answer

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

Question 14

Which of the following statements is/are correct?

Accepted Answer

Option D is correct as it includes both statements A and C, which are both correct. Option A defines invested capital correctly, and Option C correctly notes that return on investment focuses on evaluating how well an investment centre has used its invested capital. Option B is incorrect as profit is not the only important factor when evaluating an investment centre.

Question 15

Which of the following statements is false?

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 16

Which of the following is an example of an intrinsic reward?

Accepted Answer

Personal satisfaction is an example of an intrinsic reward because it is internal and self-motivating, rather than a tangible external reward like cash, a larger office, or a certificate.

Question 17

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

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 the correct mathematical expression for return on investment?

Accepted Answer

Return on investment (ROI) is calculated by multiplying the sales margin by the capital turnover.

Question 19

Return on investment may be improved by increasing:

Accepted Answer

Increasing capital turnover (how quickly a company is able to generate revenue using its assets) or sales margin (the percentage difference between the sale price and the cost of goods sold) would both positively impact return on investment, while increasing cost of goods sold and expenses would negatively impact it, and increasing sales revenue alone may not necessarily result in a higher ROI if the cost of capital remains the same. Therefore, the best choice is D.

Question 20

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?

Accepted Answer

Return on investment = (Income / Invested capital) x 100%
12% = (180,000 / Invested capital) x 100%
Invested capital = $1,500,000

Quiz 13: Financial Performance Measures and Incentive Schemes