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finance data bank




Question;101.Economic;value added (EVA?) for a division;AEncourages divisional;mangers to accept only new capital projects (i.e., long-term investments) with;a. return on investment (ROI) that exceeds the;current ROI.;B. Of $50,000 indicates;that the division earned $50,000 for the company.;C Of $10,000 indicates;that the division's actual earnings (adjusted for bias effects of accounting. conservatism) exceed the company's cost of;capital by $10,000.;D.;Is considered appropriate for evaluating;the financial performance of profit but not investment centers.;E.;Has the added benefit of being usable;for income tax determination purposes.;102.An appropriate transfer price between two;divisions of The Stark Company can be determined from the following data;What is the natural bargaining;range for the two divisions?;A.;Between $20 and $50.;B.;Between $50 and $70.;C.;Any amount less than $50.;D.;$50 is the only acceptable price.;E.;$20 is the only acceptable price.;103.Decentralized firms can delegate authority and;yet retain control and monitor managers' performances by structuring the;organization into so-called "responsibility centers." Which one of;the following business segments/responsibility centers is most like an;independent business?;A.;Revenue center.;B.;Profit center.;C.;Cost center.;D.;Profit center.;E.;Investment center.;104.Which one of the following statements pertaining;to the return on investment (ROI) as a divisional performance measure is;incorrect?;A.When the average age of assets differs;substantially across divisions of a business the use of ROI may not be appropriate.;B ROI relies on;financial measures that are capable of being independently verified while other;forms of. performance measures are subject to;manipulation.;C The use of ROI may;lead manages to reject capital investment projects that can be justified using. discounted cash flow (DCF) models.;DThe use of ROI can make;it undesirable for a skillful manager to take on trouble-shooting assignments. such as those involving turning around;unprofitable divisions.;E.The use of ROI can lead managers to emphasize the;ROI of his/her division over the profitability of the organization as a whole.;105.Managerial performance can be measured in;various ways, including return on investment (ROI) and residual income (RI). A;good reason for using RI rather than ROI is;A.;RI can be computed without regard to;identifying an investment base.;B.;Goal congruence is more likely to be;promoted by using RI.;C.;RI is well understood and often used and;discussed in the financial press.;D.;ROI does not take into consideration;both the asset turnover (AT) ratio and the return-on-sales (ROS) percentage.;E.;An imputed interest rate (minimum rate;of return) does not have to be specified.;106.Return on investment;(ROI), residual income (RI), and Economic Value Added (EVA?) all have in common;which one of the following characteristics?;A.;They all lead to goal-congruency;problems when used to evaluate subunit performance.;B.;They all incorporate nonfinancial;performance measures into the metric.;C.;They all rely on the use of data used in;the preparation of financial statements (for external reporting).;D.;They are all relative (rather than;absolute) performance indicators.;E.;They all incorporate in the performance;metric some measure of investment.;107.The basic objective of the residual income (RI);approach to divisional performance measurement and evaluation is to have a;division maximize its;A.;Return on investment (ROI) rate.;B.;Imputed interest rate charge.;C.;Cash flows, after taxes.;D.;Cash flows in excess of a desired;minimum amount.;E.;Operating income in excess of an imputed;charge for capital invested in the division.;108.Which of the following items would most likely not;be incorporated into the calculation of a division's investment base when using;the residual income (RI) approach for performance measurement and evaluation?;A.;Fixed assets used in divisional;operations.;B.;Land being held by the division as a;site for a new plant in the future.;C.;Division inventories when division;management exercises control over the inventory levels.;D.;Division accounts payable when division;management exercises control over the amount of short-term credit utilized.;E.;Division accounts receivable with;division management exercises control over credit policy and credit terms.;109.Which of the;following is a true about return on investment (ROI)?;A.;It is generally used to evaluate the;short-term financial performance of profit centers.;B.;Its use can motivate suboptimal decision;making on the part of subunit managers.;C It is defined as the difference;between some measure of "profit" and an imputed charge for use of;assets. by the subunit whose performance is being;evaluated.;D.;When inflation is low, it approximates;the amount of economic income that a subunit generates.;E.It;generally cannot be used to compare the financial performance of one unit in an;organization to other units in that organization.;110.Residual income (RI) may be a better measure for;performance evaluation of an investment center manager than return on;investment (ROI) because;A.;The problems associated with measuring;the asset base are eliminated.;B.;Desirable investment decisions will not;be neglected by high-return divisions of the company.;C.;Only the gross book value (GBV) of;assets needs to be calculated.;D.;Returns do not increase as assets are;depreciated.;E.;The arguments over the implicit cost of;capital are eliminated.;111.Which of the following is not a;criticism of using return on investment (ROI) for divisional performance;evaluation?;A.;ROI may not capture and reflect value;creation in the "new economy.;B.;ROI does not take into consideration the;amount of capital invested in the division whose performance is being;evaluated.;B. The ROI metric has a;short-term focus/orientation.;D. ROI fails to capture;broader elements of "performance," beyond financial performance.;EThere is a disconnect;between models used for the analysis of long-term capital investment projects;and. subsequent evaluation;of the financial results of those projects.;112.Listed below is;selected financial information for the Western Division of the Henzel Company;for last year;If;Henzel treats the Western Division as an investment center for performance;evaluation purposes, what is the before-tax return on investment (ROI) for last;year? (Round your answer to two decimal places.);A.;34.68%.;B.;26.76%.;C.;22.54%.;D.;19.79%.;E.;16.67%.;113.James Webb is the general manager of the;Industrial Product Division, and his performance is measured using the residual;income (RI) method. Webb is reviewing the followed forecasted information for;his division for the coming year;If;the imputed interest charge is 15% and Webb wants to achieve an RI target of $2;million, what will costs have to be in order to achieve the target?;A.;$9,000,000.;B.;$10,800,000.;C.;$23,620,000.;D.;$25,150,000.;E.;$25,690,000.;Parkside;Inc. has three divisions (Entertainment, Plastics, and Video Card), each of;which is considered an investment center for performance-evaluation purposes.;The Entertainment Division manufactures video arcade equipment using products;produced by the other two divisions, as follows;1. The;Entertainment Division purchases plastic components from the Plastics Division;that are considered unique (i.e., they are made exclusively for the;Entertainment Division). In addition, the Plastics Division makes less-complex;plastic components that it sells externally, to other producers.;2.;The Entertainment Division purchases;for each unit it produces, a video card from Parkside's Video Card Division;which also sells this video card externally (to other producers).;The;per-unit manufacturing costs associated with each of the above two items, as;incurred by the Plastic Components Division and the Video Card Division;respectively, are;114.The Plastics;Division sells its commercial products at full cost plus a 25% markup and;believes the proprietary plastic component made for the Entertainment Division;would sell for $6.25/unit on the open market. The market price of the video;card used by the Entertainment Division is $10.98/unit. A per-unit transfer;price from the Video Cards Division to the Entertainment Division at full cost;$9.15, would;A.;Allow evaluation of both divisions on a;competitive basis.;B.;Satisfy the Video Cards Division profit;desire by allowing recovery of opportunity costs.;C.;Demotivate the Entertainment Division;and cause mediocre performance.;D.;Provide no profit incentive for the;Video Cards Division to control or reduce costs.;E.;Encourage the Entertainment Division to;purchase video cards from an outside source.;115.Assume that the;Entertainment Division is able to purchase a large quantity of video cards from;an outside source at $8.70/unit. The Video Cards Division, having excess;capacity, agrees to lower its transfer price to $8.70/unit. This action would;likely;A. Optimize;the profit goals of the Entertainment Division while subverting the profit;goals of Parkside Inc.;B.;Allow evaluation of both divisions on the same basis.;C.;Subvert the profit goals of the Video Cards Division while optimizing the;profit goals of the Entertainment Division.;C. Cause mediocre;behavior in the Video Cards Division as lost opportunity costs increase. E.;Optimize the overall profit goals of Parkside Inc.


Paper#51034 | Written in 18-Jul-2015

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