Exam 13: Financial Performance Measures and Incentive Schemes

The Fitzroy division of Brisbane Enterprises has negative residual income of $540 000. Fitzroy's management is considering an investment opportunity that will reduce this negative amount to $400 000. The investment:

Carlton division has been stagnant for the past five years, neither growing nor contracting in size and profitability. Investment in new property, plant and equipment has been minimal. Would the division's use of total assets (valued at net book value) when measuring return on investment result in (1) using numbers that are consistent with those in the balance sheet and (2) a rising return on investment over time?

Richard's Division of Richard and Sons has the following data related to a particular period: Calculate the amount of residual income for the period.

When employees feel that they have made a significant achievement in reaching the purpose of the task they are working on, this has been identified (Robbins et al., 2004; Thomas, 2000) as:

Value-based management (VBM) is a framework for making key decisions that add economic value to the business. Morin & Jarrell (2001) identified four aspects of VBM. Identify these four aspects and in your own words outline how these aspects assist managers in their decision making.

Discuss three ways that the problems associated with using Return on Investment (ROI) can be minimised.

Which of the following is a key difference between EVA and residual income?

Value-based management refers to:

Identify and describe two advantages and two limitations of using return on investment (ROI) to evaluate the performance of investment centres.

Gainsharing is one system companies can use to distribute cash bonuses to employees when the performance of their segment outperforms the set target.

Richard's Division of Richard and Sons has the following data related to a particular period: Calculate the return on sales for the period.

Bricker Fabrics reported a profit margin during the year of 20 per cent and an investment turnover of 40 per cent. What was its return on investment for the year?

Managers' performance in an investment centre can best be evaluated by:

Which of the following items do not form part of the economic value added calculation?

The return on investment can be defined as:

Providing an employee incentive scheme that offers more frequent and timely incentives will:

Invested capital can be defined as net assets, total assets, productive assets or working capital.

Tentafield Ltd has an after tax operating income of $2.6 million, assets totalling $8 million and current liabilities totalling $400 000. The weighted average cost of capital is 10 per cent. What is the economic value added?

The formula for economic value added and the residual income are interchangeable.

Which of the following statements is/are false? i. Return on investment encourages managers to take a long-term view of corporate performance. ii. Return on investment may encourage managers to defer the replacement of worn assets. iii. Return on investment may encourage managers to increase expenditure on research and development.