Exam 22: Multinational Performance Measurement and Compensation

Use the information below to answer the following question(s). Brandorf Company has two sources of funds: long term debt with a market and book value of $9 million issued at an interest rate of 10 percent; and, equity capital that has a market value of $6 million (book value of $2 million). The cost of equity capital is 5 percent, while the tax rate is 30 percent. Brandorf Company has profit centres in the following locations with the following data: -What is EVA for St. Johns?

A multinational established a division in a South American country as a subsidiary corporation, with an initial investment in total assets of 13 million CU's (the local currency is CU's), which cost the company $3,250,000 Canadian at the time. The company sent an experienced manager to run the division, and gave her a target of 13% required rate of return, promising a bonus if this was met and/or exceeded. After one year, the subsidiary manager was pleased to report a 20% ROI. You have been able to determine the following data pertaining to the subsidiary: ? Exchange rate at end of year was 8 CU's to 1 Cdn dollar ? Operating income was earned evenly throughout the year ? The exchange rate changed approximately evenly throughout the year Required: a. Calculate the subsidiary's income in CU's. b. Calculate the subsidiary's return on investment in Canadian dollars. c. Calculate the subsidiary's residual income in Canadian dollars.

Paymaster Company provided the following information for the year just ended. What is the return on investment?

If the exchange rate at the end of the a foreign subsidiary's first year was 5 Fidgets to 1 Canadian dollar, and if it was 8 Fidgets to 1 Canadian dollar at the end of the second (current) year, what exchange rate should be used to convert total assets if we want to calculate the company's ROI in Canadian dollars?

Novella Ltd. reported a return on investment of 16%, an asset turnover of 6, and income of $190,000. On the basis of this information, the company's invested capital was

What disadvantage is there in using ROI and/or RI as performance measures?

Answer the following question(s) using the information below: Miller Medical Services provided the following information for it past year's operations in its Hospital Bed Division. -What is the Hospital Bed Division's asset turnover?

Bob Cellular Phone uses ROI to measure divisional performance. Annual ROI calculations for each division have traditionally employed the ending amount of invested capital along with annual operating income and net revenue. The DuPont method is generally used. The company's Phone Accessories Division had the following results: Previous Year ROI = ($2,000,000/$20,000,000) × ($20,000,000/$10,000,000) = 0.20 Current Year ROI = ($2,400,000/$25,000,000) × ($25,000,000/$15,000,000) = 0.16 Corporate management was disappointed in the performance of the division for the current year since it had made an additional investment in the division which was budgeted for a 23 percent ROI. Required: a. Discuss some factors that may have contributed to the decrease in ROI for the current year. b. Assume total assets employed are 10% less than total assets. What is the effect of using total assets employed when calculating ROI?

Answer the following question(s) using the information below: Miller Medical Services provided the following information for it past year's operations in its Hospital Bed Division. -What is the Hospital Bed Division's return on sales if income is defined as operating income?

Answer the following question(s) using the information below: Carriage Ltd. manufactures baby carriages. The company has two divisions, Wheels and Assembly. Because of different accounting methods and inflation rates, the company is considering multiple evaluation measures. The following information is provided for the year just ended: The company is currently using a 12% required rate of return. -What are Wheels's and Assembly's return on investment based on current values, respectively?

Use the information below to answer the following question(s). Berger Publishing has two divisions which operate autonomously. Their results for the past year were as follows: The company's desired rate of return is 15%. -What are the respective residual incomes for the Toronto and Vancouver divisions?

Use the information below to answer the following question(s). The top management at Groundsource Company, a manufacturer of lawn and garden equipment, is attempting to recover from a flood, which destroyed some of its accounting records. The main computer system was also severely damaged. The following information was salvaged: -What is the Tractor Division's investment turnover?

Capital Investments has three divisions. Each division's required rate of return is 15 percent. Planned operating results for next year are: The company is planning an expansion requiring each division to increase its investments by $25,000,000 and its income by $4,500,000. Required: a. Compute the current ROI for each division. b. Compute the current residual income for each division. c. Rank the divisions according to their current ROIs and residual incomes. d. Determine the effects after adding the new project to each division's ROI and residual income. e. Which Divisions are pleased with the addition and which ones are unhappy assuming the managers are evaluated on a combination of ROI and residual income? Is a combination of ROI and residual income appropriate for the divisions?

Use the information below to answer the following question(s). Berger Publishing has two divisions which operate autonomously. Their results for the past year were as follows: The company's desired rate of return is 15%. -What are the respective return on investment ratios for the Toronto and Vancouver divisions?

A company has total assets of $500,000, a required rate of return of 10%, and operating income for the year was $200,000. What is the residual income?

The Tea Division of Canadian Products is planning the operating budget for next year. Average total assets of $1,700,000 will be used during the year and unit selling prices are expected to average $250 each. Variable costs of the division are budgeted at $600,000 while fixed costs are set at $450,000. The company's required rate of return is 10%. Required: a. Compute the volume necessary to achieve a 15% ROI. b. The division manager receives a bonus of 50% of the residual income. What is his anticipated bonus for next year assuming he achieves the targeted operating income in part a. and the required return is based on 10%?

LaserLife Printer Cartridge Company is a decentralized organization with several autonomous divisions. The division managers are evaluated, in part, on the basis of the change in their return on invested assets. Operating results for the Packer Division for the upcoming year are budgeted as follows: Total assets for the division are currently $3,600,000. For next year the division can add a new product line for an investment of $600,000. The new product line will generate sales of $1,600,000 and will incur fixed expenses of $600,000 annually. Variable costs of the new product will average 60 percent of selling price. Required: a. What will be the company's ROI after accepting the new product line? b. If the company's required rate of return is 6 percent, and residual income is used to evaluate managers, would this encourage the division to accept the new product line? Explain and show computations.

Answer the following question(s) 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 centres 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?

Use the information below to answer the following question(s). The top management at Groundsource Company, a manufacturer of lawn and garden equipment, is attempting to recover from a flood, which destroyed some of its accounting records. The main computer system was also severely damaged. The following information was salvaged: -What is the value of the total assets belonging to the Tractor Division?

Use the information below to answer the following question(s). Thacker Company has two regional offices. The information for each is as follows: -What is the return on investment for the Sarnia division?