Exam 12: Agency Problems, Compensation, and Performance Measurement

Briefly explain how a plant manager can improve EVA (economic value added)?

In large public companies monitoring is the primary responsibility of the: i.shareholders; II)board of directors; III)independent accountants; IV)lenders

One calculates economic value added (EVA)as follows:

A firm has an average investment of $10,000 during the year.During the same period,the firm generates after-tax income of $1,000. Calculate the economic value added (EVA)for the firm.(The cost of capital is 15%.)

Define the term economic rate of return.

Briefly explain the term qualified opinion issued by the auditors.

The economic rate of return on an asset is defined as:

A firm produces $65 million of net income on $2,030 million of assets.Given that investors expect a 5% return,what is the economic profit?

Which of the following is the most likely example of bias in a firm's accounting profitability measures?

Which type of situation best represents "gambling for redemption"?

Economic profit can be increased by reducing assets employed.

The following are agency problems associated with capital budgeting except:

A firm has an average investment of $10,000 during the year.During the same time,the firm generates after-tax income of $2,000. If the cost of capital is 15%,what is the net return on the investment?

Monitoring is typically done by: i.shareholders; II)board of directors; III)independent accountants; IV)lenders

Agency costs can be thought of as the loss in the value of a firm resulting from the following actions by managers: i.reduced effort; II)perks or private benefits; III)empire building; IV)entrenching investments; V)avoiding risks

Define the term economic value added (EVA).

The main idea behind EVA is a new concept recently introduced into finance.

Survey data show that managers admit to managing earnings.

Accounting income takes no account of the cost of the capital employed by a firm.

A firm has an average investment of $100,000 during the year.During the same period,the firm generates an after-tax income of $16,000.If the cost of capital is 15%,what is the economic profit?