Question 1

Waddington Corporation currently has a return on investment of 12%. The Madrid division is reporting residual income of $1,000,000 and a 14% return on investment. The Madrid division is contemplating an investment opportunity which has an 11% return on investment and a positive residual income. Should Madrid division's management make the investment if goal congruence is important to the Waddington Corporation?

Accepted Answer

A)  No, because Waddington Corporation's return on investment will decrease. 
B)  No, because Madrid division's return on investment will decrease. 
C)  Yes, because Waddington Corporation's residual income will increase. 
D)  Yes, because Waddington Corporation will be better off if any investment with a positive return on investment is made.

Question 2

Which of the following will not change a company's return on investment?

Accepted Answer

A)  An increase in the company's profit margin. 
B)  A decrease in the company's capital turnover. 
C)  An increase in the company's required rate of return. 
D)  A decrease in property, plant, and equipment.

Question 3

Which of the following does not accurately describe the balanced scorecard approach?

Accepted Answer

A)  The approach recognizes that both financial and operational performance measures should be utilized when evaluating the company's performance. 
B)  The financial perspective is the most important of the four balanced scorecard perspectives and should be stressed when evaluating performance. 
C)  A customer satisfaction rating is relevant feedback pertaining to the balanced scorecard's customer perspective. 
D)  The internal business perspective is concerned with improving operations in order to satisfy customer and financial objectives.

Question 4

Which of the following transactions will result in an increase in economic value added?

Accepted Answer

A)  The acquisition of a new building in exchange for common stock 
B)  An increase in the weighted average cost of capital 
C)  Using cash to pay a long-term liability 
D)  Issuing long-term bonds payable in exchange for cash

Question 5

Which of the following is not taken into consideration when calculating residual income?

Accepted Answer

A)  Operating income 
B)  Minimum target rate of return 
C)  Total assets 
D)  Capital turnover

Question 6

Return on investment is calculated by:

Accepted Answer

A)  multiplying the profit margin by investment turnover. 
B)  multiplying total assets by the target rate of return. 
C)  dividing profit margin by investment turnover. 
D)  dividing sales by total assets.

Question 7

Selling property, plant, and equipment at a loss will result in an increase in return on investment.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following is not taken into consideration when calculating return on investment?

Accepted Answer

A)  Profit margin 
B)  Capital turnover 
C)  Target rate of return 
D)  Sales

Question 9

Which of the following is irrelevant with respect to calculating economic value added?

Accepted Answer

A)  The income tax rate. 
B)  Current liabilities 
C)  The minimum required rate of return 
D)  Total assets

Question 10

The management of Mullen Division has provided the following information:
Operating assets: $600,000
Operating income: $90,000
Sales: $300,000
Management is considering investing in an additional project costing $60,000; it is estimated that the project will create operating income of $7,200. Mullen's minimum desired rate of return is 10%. Should Mullen's management invest in the project if management is evaluated using residual income?

Accepted Answer

A)  Yes, because the operating income is positive. 
B)  No, because the return on investment for the project is less than Mullen's current return on investment. 
C)  No, because the investment will lower Mullen's residual income. 
D)  Yes, because the project's return on investment exceeds the minimum desired rate of return.

Question 11

The management of Mullen Division has provided the following information:
Total assets: $600,000
Operating income: $90,000
Sales: $300,000
Management is considering investing in an additional project costing $60,000; it is estimated that the project will create operating income of $7,200. Mullen's minimum acceptable rate of return is 10%. How much is Mullen's overall residual income if the investment is made?

Accepted Answer

A)  $31,200 
B)  $1,200 
C)  $61,200. 
D)  $47,200

Question 12

Assume division 1 of the XYZ Company had the following results last year (in thousands). Management's required rate of return is 8% and the weighted average cost of capital is 6%. Its effective tax rate is 30%.
$$\begin{array} { | l | r | } 
\hline \text { Sales } & \$ 5,000,000 \
\hline \text { Operating income } & \$ 1,000,000 \
\hline \text { Total assets } & \$ 10,000,000 \
\hline \text { Current liabilities } & \$ 500,000 \
\hline
\end{array}$$ What is the division's capital turnover?

Accepted Answer

A)  5% 
B)  10% 
C)  20% 
D)  50%

Question 13

One disadvantage of the economic value added approach is its short-run focus which can lead to a lack of long-term goal congruence.

Accepted Answer

A) True 
 B)False

Question 14

The management of Mullen Division has provided the following information:
Total assets: $600,000
Operating income: $90,000
Sales: $300,000
Management is considering investing in an additional project costing $60,000; it is estimated that the project will create operating income of $7,200. Mullen's minimum acceptable rate of return is 10%. Which of the following statements is incorrect?

Accepted Answer

A)  The impact of the investment on Mullen's capital turnover can't be determined given the information provided. 
B)  Mullen's residual income will increase if the investment in the project is made. 
C)  Mullen's return on investment will increase if the investment in the project is made. 
D)  Mullen's residual income will increase because the project's return on investment exceeds the minimum acceptable rate of return.

Question 15

Which of the following will not result in an increase in both return on investment and residual
Income?

Accepted Answer

A)  An increase in the unit selling price. 
B)  A decrease in variable manufacturing costs. 
C)  A decrease in property, plant, and equipment. 
D)  A decrease in the minimum required rate of return.

Question 16

Assume the Apple division of the Gala Company had the following results last year (in thousands). Managements required rate of return is 10% and the weighted average cost of capital is 8%. Its effective tax rate is 30%.
$$\begin{array} { | l | r | } 
\hline \text { Sales } & \$ 3,000,000 \
\hline \text { Operating income } & \$ 500,000 \
\hline \text { Total assets } & \$ 4,500,000 \
\hline \text { Current liabilities } & \$ 300,000 \
\hline
\end{array}$$ What is Apple division's profit margin?

Accepted Answer

A)  11.11% 
B)  16.67% 
C)  66.67% 
D)  60%

Question 17

A decrease in the income tax rate will:

Accepted Answer

A)  increase residual income. 
B)  increase return on investment. 
C)  increase economic value added. 
D)  not affect economic value added.

Question 18

Which of the following statements regarding the weighted average cost of capital is incorrect?

Accepted Answer

A)  The weighted average cost of capital considers the rate of return required by long-term creditors. 
B)  The weighted average cost of capital considers the rate of return required by investors. 
C)  The weighted average cost of capital represents the minimum rate of return required by investors and long-term creditors. 
D)  There is an inverse relationship between the weighted average cost of capital and business risk.

Question 19

Hancock Corporation has a capital turnover of 2, sales of $500,000, and a return on investment of 4%. What was Hancock's operating income??

Accepted Answer

A)  $250,000 
B)  $500,000 
C)  $10,000 
D)  $20,000

Question 20

Norwood Company has a return on investment of 10%, operating income of $200,000, and a capital turnover of 4.0. How much were Norwood's total assets?

Accepted Answer

A)  $2,000,000 
B)  $800,000 
C)  $8,000,000 
D)  $20,000

Exam 23: Performance Evaluation and the Balanced Scorecard