finance data bank
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.)
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?
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.