Exam 22: Multinational Performance Measurement and Compensation

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?

Investment turnover is calculated by dividing investment by revenues.

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?

What were the sales for Beta Division?

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 Stonybrook?

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 value of the total assets belonging to the Beta Division?

A company's weighted-average cost of capital [WACC] was 9.6% last year.The company has $6,000,000 of bonds payable (its only debt)with a 9.25% coupon,and has $9,000,000 in equity capital.The tax rate is 35%.What is the company's cost of debt funding?

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?

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?

Using gross book value as an investment base will result in a lower ROI than using net book value as an investment base.

Briefly explain each of the four levers of control.Why does a company need to implement more than a diagnostic control system?

Current cost is the cost of purchasing an asset today identical to the one currently held.

The following table presents information related to three divisions of Bacchus Ltd.: The company's required rate of return is 10%. Required: Solve for the unknowns.

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 value of the total assets belonging to the Alpha Division?

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?

Last year Reynolds Ltd.reported the following results: Required: a.Using the DuPont method,calculate the company's return on investment for the year just ended. b.Assuming the company's sales,operating expenses,and assets remain the same as last year,by how much would the gross margin percentage have to increase to achieve a 20% return on investment? c.Assume the company sets a minimum required return of 13%,what would the residual income be?

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?

List and describe the steps involved in making decisions on performance measures.

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

Use the information below to answer the following question(s). The following data are available for a foundry operation started as a new company four years ago when the construction cost index was 125: * = "of long-term assets at historical cost" -What is the year 4 operating income using year-4 current cost amortization?