Exam 22: Multinational Performance Measurement and Compensation

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 Bish Bash Falls?

Answer the following question(s) using the information below: 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?

Holmes Electronics Ltd. has three divisions: Resistors, Semiconductors and Transistors, each located in a different geographic region. Data for its most recent year are presented below: The company is currently using a required rate of return of 16 percent. Required: a. Compute the ROI using both book value and current value for all divisions. Round to four decimal places. b. Compute residual income using book value and current value for all divisions. c. Does book value or current value provide the better basis for performance evaluation? Why? Which division is the most successful?

Provide the missing data for the following situations:

Chaucer Ltd. has current assets of $450,000 and capital assets of $630,000. Its budgeted production volume for the next fiscal year is 200,000 units. Fixed costs are projected at $400,000 and variable unit costs for the one product produced total $5/unit. The company defines ROI as Operating Income/Total Assets and its required rate of return is 14%. Required: a. What selling price should Chaucer charge for its product if it wishes to achieve a 25% ROI? What is the operating income at this price? b. The general manager for Chaucer receives a bonus equal to 12% of the residual income for the period. Calculate the amount of the bonus assuming the selling price calculated in part c. Prepare a brief memo to the President of Chaucer outlining the advantages and disadvantages of ROI and Residual Income. Include your recommendations for the most appropriate method for calculating the bonus.

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 Tiller 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 Edmonton Division's return on investment?

Use the information below to answer the following question(s). Ruth Cleaning Products manufactures home cleaning products. The company has two divisions, Bleach and Bleach-2. 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 required rate of return of 15 percent. -What are Bleach's and Bleach-2's residual incomes, based on current values, respectively?

Gasfield Maintenance Ltd. purchased equipment for $225,000 that was CCA Class 8 (CCA rate of 20%). The vehicle was the only item in the Class 8 capital cost allowance pool. The vehicle is expected to generate net cash income, prior to tax effect, in the amount of $75,000 per year. The company uses straight-line depreciation, estimates a 5 year useful life with a $25,000 salvage value for the new equipment at the end of year 5. The marginal tax rate is 35% and the company's average tax rate is 25%. Management requires a rate of return of 15.0%. Assume that cash flows occur at the end of the year. Required: a. What is the net present value of the investment in the vehicle? Include the effect of taxes in your calculation. b. What is the anticipated residual income for the first year? The company uses net cash income for its' RI calculations. c. What is the expected ROI for years one, two, and three assuming the company uses operating income and net book value for the calculations. What is the likely effect from using net book value in the ROI calculation on the management bonus system?

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 were the sales for the Tiller Division?

Alpine Ltd. has two divisions. Division A manufactures components that can be sold in the external market place or transferred to Division B for further processing. The following data relate to Division A's component product. Variable manufacturing costs/unit $925 Fixed costs/unit at capacity $275 Selling price/unit $1,800 The capacity of the plant is 2,500 units per year. Division B has offered to purchase 350 units from Division A at a price of $1,600/unit, which is the market price of the component. The manager of Division A has refused this offer stating that it would only return a rate of 25.00%, when the divisional target return on sales is 28.00%. The Division A manager also states that additional fixed costs of $195,000 would be required to produce the 350 units. The corporate required rate of return is 18% of assets and the existing asset base in Division A is $2,500,000. Required: a. How many units must Division A sell in order to achieve its required ROR? What profit margin would be earned at this level of sales? b. Assume Division A currently sells 2,000 units to the external market and can accept Division B's offer without affecting its external sales. Evaluate the refusal of Division B's offer from the standpoint of the corporation as a whole and from Division A manager's perspective. c. Assume Division A currently sells 2,000 units to the external market and can accept Division B's offer without affecting its external sales. Calculate Division A's residual income with and without the sale to Division B. d. What recommendations would you give to the President of Alpine Ltd. with respect to performance evaluation of the divisions?

Consolidated 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 the current year are as follows: Required: a. Compute the return on investment for each station. b. Which station manager is doing best based only on ROI? c. Are any of the stations under performing? d. Should the required rate of return be the same for each station if the business risks are different? Explain.

Broughton Industries Ltd. is a publicly traded company and is organized into divisions. The company currently has a stock option plan for its head office executives only and it now is considering establishing an incentive program for its divisional managers. The proposal is to create a bonus pool based on a predetermined percentage of corporate net income after taxes. Divisional managers will be eligible for money from the bonus pool based on achievement of divisional return on investment (ROI). The calculation of the divisional ROI will be based on divisional net income (including an allocation of head office charges) and investment is defined as total assets. Required: Evaluate the proposed incentive plan. What changes would you recommend, if any, to the proposal?

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%. -During the past year Badger Company had a net income of $175,000. What is the ROI if the investment is $25,000?

Coptermagic Company supplies helicopters to corporate clients. Coptermagic has two sources of funds: long term debt with a market and book value of $32 million issued at an interest rate of 10%, and equity capital that has a market value of $18 million and book value of $8 million. The cost of equity capital for Coptermagic is 15%, and its tax rate is 30%. Coptermagic has profit centres in four divisions that operate autonomously. The company's results for the past year are as follows: Required: a. Compute Coptermagic's weighted average cost of capital. b. Compute each division's Economic Value Added. c. Rank the divisions by EVA.

Answer the following question(s) using the information below: 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 Gold Division?

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 return on sales?

The Irnakk Corporation manufactures iPod covers in Canada and China. The operations are organized as decentralized divisions. The following information is available for the year just ended: The exchange rate at the time of Irnakk's investment (the end of the previous year) in China was 7.5 Chinese yuan = $1 Canadian. During the year, the yuan declined steadily in value and the exchange rate at the end of the current year was 8.5 yuan = $1 Canadian. The average exchange rate during the year was 8 yuan = $1 Canadian. Required: a. Calculate the Canadian Division's ROI for last year based on dollars. b. Calculate the Chinese Division's ROI for last year based on yuan. c. Which of Irnakk's two divisions earned the better ROI? Explain your answer, complete with supporting calculations showing the China Division ROI in Canadian dollars.

Use the information below to answer the following question(s). The top management at Munchie Company, a manufacturer of computer games, 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 Alpha Division's return on sales?

The Coffee Division of Canadian Products is planning the operating budget for next year. Average total assets of $1,500,000 will be used during the year and unit selling prices are expected to average $100 each. Variable costs of the division are budgeted at $400,000 while fixed costs are set at $250,000. The company's required rate of return is 18%. Required: a. Compute the volume necessary to achieve a 20% 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 18%?