Exam 22: Multinational Performance Measurement and Compensation

A division within a firm has an average return on assets employed of 12% and is considering purchasing a new asset.The new asset is expected to generate cash flows of $17,000 per year for the next seven years but these have a beta coefficient of 1.3 compared to the portfolio return on the other assets in the division.The risk free rate of return is 2%; the weighted average cost of capital is 9%; and, the cost of the new asset is $170,000. -What is the residual income?

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 for Brooksville?

Hargrave Products has three divisions which operate autonomously.Their results for the current year were as follows: The company's desired rate of return is 15 percent.Required: a.Compute each division's ROI.Round to three decimal places. b.Compute each division's residual income. c.Rank each division by both ROI and residual income.

Which of the following is NOT a reason for evaluating subunits over a multi-year time horizon?

Stratton Industries has two divisions.These divisions reported the following results for the year just ended: Required: a.Calculate the ROI for each division.Which division would you consider to be the most successful? Why? b.Now assume that the company requires a 14% minimum rate of return.Calculate the residual income for each division.Which division would you consider to be the most successful? Why?

Which of the following statements is TRUE relative to performance evaluations?

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?

Use the information below to answer the following question(s).Thacker Company has two regional offices.The information for each is as follows: -Keeping all other factors constant, which of the following would NOT cause an increase in the return on investment?

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 ( )for the Blue Division?

A multinational corporation 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: 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.

The three alternatives for increasing return on investment include increasing assets such as receivables, increasing revenues, and decreasing costs.(In all cases assume that all other items stay the same.)

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).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 Beta Division's investment turnover?

Imputed costs are costs recognized in particular situations that are not regularly recognized by accrual accounting procedures.

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 Digger Division's return on investment?

There are three basic ingredients in profitability: investment, revenue, and debt.

Which of the following is TRUE concerning the ROI performance measure?

Well-designed compensation plans for executives focus on risk and long-term incentives.

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.

One way to achieve greater comparability of historical-cost based ROIs is to restate performance in current dollars.