Exam 16: Performance Evaluation and Compensation

In a profit centre, managers' primary goal is to maximize revenues.

Which type of knowledge is most costly to transfer within an organization?

Bellingham Division has a required rate of return by corporate headquarters of 20%. The weighted average cost of capital is 12%. You are given the following information for Bellingham's operations for a two-year period: 2005 2004 Current assets $ 50,000 $ 60,000 Long-term assets 200,000 204,000 Accumulated amortization 60,000 44,000 Current liabilities 40,000 20,000 Long-term debt 100,000 140,000 Operating income for the year 19,000 21,000 Tax rate 40% 40% The EVA for 2005 was:

Teresa's Taco Co. had the following results during the most recent year: Sales $500,000; Residual income $5,000; investment turnover 2.5; and a required rate of return of 15%. The capital investment was:

How are research and development costs treated for financial reporting and for economic value added (EVA)calculations? Financial Reporting EVA

Suppose an office building is owned for which long-term leases have been signed, the tenants pay utilities and operating costs, and straight-line amortization is taken. The rate of return on the book value of this investment can be expected to:

Bellingham Division has a required rate of return by corporate headquarters of 20%. The weighted average cost of capital is 12%. You are given the following information for Bellingham's operations for a two-year period: 2005 2004 Current assets $ 50,000 $ 60,000 Long-term assets 200,000 204,000 Accumulated amortization 60,000 44,000 Current liabilities 40,000 20,000 Long-term debt 100,000 140,000 Operating income for the year 19,000 21,000 Tax rate 40% 40% The ROI for 2005 was:

Use appropriate information from the list below to calculate the amounts indicated. Operating income $ 50,000 Adjusted after-tax operating income 35,000 Adjusted total assets 80,000 Average operating assets 90,000 Current liabilities 15,000 Revenue 120,000 Weighted average cost of capital 10% a)Calculate return on investment b)Calculate residual income c)Calculate economic value added

St. John's Division has a required rate of return of 15%. The weighted average cost of capital is 10%. Information for St. John's Divisions operations over the past 2 years follows: 20x5 20x4 Current assets $120,000 $100,000 Property, plant and equipment (cost)300,000 280,000 Accumulated amortization 80,000 60,000 Current liabilities 90,000 70,000 Long-term debt 85,000 80,000 Pretax operating income 52,800 48,900 Income tax rate 30% 30% What was the St. John's Division residual income for 20x5?

The Shannon Division of the Wasson Widget Co. requires a 12% rate of return. During a recent year Shannon had a net income of $400,000 and a residual income of $250,000. What was its ROI?

Thurston, Inc. experienced a 14% rate of return on average investment of $1,000,000. If the required rate of return is 12%, then residual income is:

Economic value added can be measured so that it reduces most of the problems that arise under residual income.

Division A of a firm produces a single product, which is sold only to Division B. Division A has a total investment of $1,000,000, while Division B has a total investment of $2,000,000. Division A annually sells 100,000 units of its product to Division B for $5 per unit and earns $150,000 in operating income. Division B currently earns $250,000. If Division A raises its selling price to $6 per unit and nothing else changes:

Stock-based compensation has been used to encourage:

Centralized organizations may decide to decentralize their decision-making authority once they begin operations in foreign countries. Explain why this occurs.

KNY Corporation reported operating income of $80,000 and average operating assets of $120,000 in a recent accounting period. Which of the following transactions would definitely increase KNY's return on investment?

Clark and Lana are product managers at SML Corporation. They are considering two potential investments, data for which are estimated below: Project A Project B Operating income $ 600 $ 750 Adjusted after-tax operating income 500 700 Adjusted total assets 1,000 3,500 Average operating assets 1,200 4,000 Current liabilities 800 500 Revenue 1,000 1,200 SML's weighted average cost of capital, which also serves as its required rate of return, is 12%. If Clark and Lana can invest in only one project, which should they choose? Why?