Chapter 13 Testbank Key 1. The return on investment can be defined as. A. capital invested divided by total sales. B, total sales divided by capital invested. G. profit divided by capital invested. . profit divided by total sales. AACSB: Reflective Diticty: Easy LLeaming Object: 13.01 Caleuate an investment centre's retum on investment (ROI) 2. Calculate the return on investment of new equipment in the first year i profit= $3 000 000 invested capital = $45 000 000 increase in divisional profits = $45 000 purchase of new machine A.5% 56.66% ©. 1.5% D. None ofthe given answers AACSB: Analytic Ditty: Easy Leaming Objective: 12.01 Caleuate an investment centre's retum on investment (RO) 3. The asset tumover of an organisation can be calculated as: A. the amount of sales revenue divided by total invested capital. B. total invested capital divided by sales revenue. C. total sales revenue divided by profit D. profit divided by sales margin. AACSB: Reflective Diticuty: Easy LLeaming Object: 12.01 Caleuate an investment centre's ratum on investment (RO) 4, Bricker Fabrics reported a profit margin during the year of 20 per cent and an investment turnover of 40 per cent. What was its retum on investment for the year? A, 50% 5. 20% £.8% 32% AACSB: Analytic! Ditty: Easy Loaming Objective: 12.01 Calewate an investment contr'sretum on investment (RO!) This documents avalate tee ochageon SEUDOCUL.COM Downloaded by Linh Pham Th? M? (lip 9405e@st.tel.edu.xn)5. Joy Home Fashions reported a return on investment during the year of 6 per cent and a profit margin of 12 per cent. ‘What was the investment turnaver for the year? A, 18% B. 50% 72% D. 20% AACSB: Analytical Diticuty: Easy LLeaming Objective: 13.04 Calculate an investment centre's retum on investment (RO}) 6. For Mildura Ltd, if the sales are $1 500 000, the invested capital $450 000 and the profit $90 000, what is the asset ‘tumover for the year? A. 20% B. 5% C. 30% 1D. 333% AACSB: Analytical Ditty: Easy Leaming Objective: 13.01 Caleuate an investment contre'sretum on investment (RO) 7. The following information pertains to Bingo Concrete for the year 2008: Sales are $1 500 000 Gross margin is $600 000 Profit is $90 000 ‘What is the profit margin for the year? A, 40% B. 30% ©. 20% D.6% AACSB: Analytics Ditty: Easy Leaming Objective: 13.01 Calewate an investment centre's retum on investment (0) 8. For Echuca Ltd sales are $1 500 000, profit is $80 000, invested capital is $450 000 and the interest rate is 8 per cent. ‘What is the residual income for the year? A, ($30 000) B. $54 000 C. $82 800 D. $36 000 AACSB: Analytical Diticity: Easy Leaming Objective: 13.04 Calculate resiual income (RI for an investment cent, and describe some advantages and disadvantages of using Rl to evaluate performance Downloaded by Linh Ph2m Th? M? (lip 9405e@st.tel.edu. vn)9. Holt Company Ltd determined residual income for the year of $22 000. The company's cost of capital was 12 per cent, the investment tumover was 2.0, and capital invested was $400 000. What was Holt Company's profit during the year? A, $26 000 B. $48 000 ©. $74 000 AACSB: Analytical Ditty: Medium Lleaming Objective: 13.04 Calculate resiual income (Ri for an investment centre, and describe some advantages and disadvantages of using Rl to evaluate performance 10. Fine Fumishings Pty Ltd eared residual income of $40 000 during the year. The net profit was $160 000 during the year and the cost of capital was 12 per cent. What was the return on investment for the year? 9% B 12% £. 16% DD" Insufficient information to determine AACSB: Analytical Ditty: Medium LLeaming Objective: 13.04 Calculate resi income (RI for an investment centre, and desenbe some advantages and disadvantages of using Rito evaluate performance 11. Precious Metals Ply Ltd earned residual income of $70 000 during the year. The net profit was $250 000 during the year and the required retum was 15 per cent. What was the invested capital? ‘A. $1 200 000 B'$1 600 000 c. $1 400 000 D:$1 300 000 AACSB: Analytcl Diticty: Easy Loaming Objocive: 13.04 Caleuate resis income (RI or an investment centro, and desenbe some advantages and disadvantages of using RI to evaluate performance This documents avalate tee ochageon SEUDOCUL.COM Downloaded by Linh Ph2m Th? M? (linptm 9405e@st.tel.ecu.sn)12 Calculate the asset turnover from the following data: Operating profit $150 000 Total variable cost $80 000 Capital invested $3 000 000 Sales revenue $2 000 000 A,0.07 B.067 0.53 D.0.05 AACSB: Analytics Ditty: Ea Loaming Objoctve: 13.01 Calewate an investment contr'srotun on investment (RO}) 13. One of the disadvantages of return on investment is that: A. it focuses on profit only and disregards the cost of the assets. Bit may discourage managers from investing in profitable projects. Cit does not enable comparison of investment centres of different sizes. D. it focuses only on long-term performance. AACSB: Reflective Ditty: Easy Leaming Objective: 13.02 Describe some advantages and limitations of RO! as a measure of performance of investment cents 414, The advantage of residual income as a measure of investment centre performance is: A itcan be used to compare investment centres of different sizes. B. it focuses on long-term performance. Gut includes the organisation's minimum required rate of return, D. it can be used to compare investment centres of different sizes AND it includes the organisation's minimum required rate of return. AACSB: Reflective Ditty: Easy Leaming Objective: 13.04 Caleuate resi income (RI) for an investment centre, and desenbe some advantages and disadvantages of using Rl fo evaluate performance 418, Which of the following gives a more accurate calculation of return on investment and residual income? A, Total capital invested 5. Total assets C. Average invested capital D. Average cost of capital AACSB: Reflective Diticuty: Easy LLeaming Objective: 13.05 Recognise the reasons forthe various defintions of prof and invested capital that can be used inthe calculation of return on Jnvestmont and residual income. Downloaded by Linh Ph2m Th? M? (linnptm19405c@st.ue.edu. un}16. Net book value produces a misleading increase in return on investment because: A. investment centres with old assets will show a higher return on investment than centres with new assets. B. investment centres with old assets will show a lower return on investment than investment centres with new assets. C. investment centres with old assets will show an equal return on investment centres with new assets D_ book value reflects changing market values. AACSB: Reflective Difcuty: Medium LLeaming Objecve: 13.05 Recognise the reasons forthe various definitions of prof and invested capital that can be used inthe calculation of return on lvostment and residual ncome 17. One of the advantages of using net book value to measure invested capital is that: A. it maintains consistency with the balance sheet prepared for external reporting purposes. Bit allows comparison of retum on investment with different companies. C. the return on investment will increase steadily over time. D. it maintains consistency with the balance sheet prepared for external reporting purposes AND it allows comparison of return on investment with different companies. AACSB: Reflective Ditty: Easy LLeaming Objective: 13.05 Recognise the reasons for the various defintions of prof and iavested capital that can be used inthe calculation of return on invostmont and rosidial neomo 18, Managers’ performance in an investment centre can best be evaluated by: A. the total revenue under their control B. the total capital invested in the organisation and the sizeable amount of return. C. the profit eamed during a period less all revenues. D. those revenues, costs and investments that they can control, AACSB: Reflective Ditty: Easy Leaming Objective: 12.01 Caleuate an investment centre's retum on investment (RO) 19. ‘Which ofthe following statements is false? A, Tying rewards to a profit-based measure can provide an incentive for managers to manipulate accounting results. B, Pay systems can be used at all levels of the organisation, . Pay systems focus on long-term results. D. ‘A pay system can include both cash and non-cash rewards. AACSB: Reflective Diticlty: Easy LLeaming Objective: 13.11 Identity the cifferent forms of performance-rlated pa This documents avalate tee ochageon SEUDOCUL.COM Downloaded by Linh Ph2m Th? M? (linhptm 9405e@st.ue.edu.un}20. Which of the following is an example of an intrinsic reward? A. Gash bonus B Personal satisfaction C_ Larger office D. Certificate of merit AACSB: Reflective Diticuty: Meum LLeaming Objecive: 13.09 Recognise the alflerence between inrinsic and extrinsic sources of motivation 21. Which of the following statements is false? ‘A. Group reward schemes help people identify with the group. B. Group reward schemes discriminate between good and bad performers. C. Group reward schemes avaid excessive competition between employees, D. Group reward schemes may encourage ‘freeloaders’, AACSB: Reflective Diticuty: Easy Leeming Objective: 13.11 Idenily the afrent forms of performance-related pay systems used in organisations 22. The profitability of an investment centre can best be evaluated by: A. the revenues, costs and investment the manager can control B. the total capital invested in the organisation and the sizeable amount of return . the profit margin and the investment capital traceable to the investment centre. D. the divisional contribution margin. AACSB: Reflective Diticuty: Easy LLeaming Objective: 13.01 Calculate an investment centre's retum on investment (RO!) 23, Which of the following statements is/are correct? ‘A, Invested capital is the assets that an investment centre has available to generate profit. B. When evaluating an investment centre, only the profit is important. C. Return on investment focuses on how effectively each investment centre has used its investment capital . Invested capital represents the assets that an investment centre has available to generate profit AND return on investment focuses on how effectively each investment centre has used its investment capital. AACSB: Reflective Diticuty: Easy |Leaming Objective: 13.01 Calculate an investment centre's retum on investment (ROH) 24, Which of the following is the correct mathematical expression for return on investment? A, Sales margin = capital turnover B. Sales margin — capital tuover , Sales margin x capital turnover D. Capital tumover + sales margin AACSB: Reflective Diticty: Easy LLoaming Objective: 13.04 Calculate an investment contr'’srotum on investment (RO!) Downloaded by Linh Ph2m Th? M? (lip 9405e@st.el.ecu.sn)25. White Hills Ltd reported a retum on investment of 12 per cent, a capital tumover of 5 and income of $180 000. What was the company's invested capital?” A, $300 000 B. $900 000 ©. $1500 000 D. $7 500 000 AACSB: Analytical Ditty: Medium LLeaming Objective: 13.04 Calculate an investment centre's retum on investment (RO}) 26. The northem division of Aussie Estates has reported a profit of $4 milion. Divisional invested capital is $2.5 million and the imputed interest rate is 12 per cent. What is the residual income? A. $180 000 8, $1.78 million C. $2.15 milion 1D. $3 700 000 AACSB: Analytical Dict: Easy Leaming Objective: 13.04 Caleuate residual income (Rl for an investment centre, and describe some advantages and disadvantages of using Rito evaluate performance 27. The Extan division of World Corporation reported a residual income of $200 000. The division had $8 milion of invested capital and a profit of $1 million. What is the imputed interest rate? ATS% B. 10.0% 012.5%. D. 20% AACSB: Analytical Diticuty: Easy Leaming Objectva: 13.04 Caleuateresiva income (Ril for an invastment centr, and descnbe some advantages and disadvantages of using Rito evaluate pertormance 28, Speedy Ltd has an imputed interest rate of 12 per cent. Division Z of Speedy Ltd has invested capital of $800 000 and a retum on investment of 15 per cent. What is the residual income? A, ($24 000) $24 000 $96 000 D. None of the given answers AACSB: Analytical Diticuty: Easy Leaming Objective: 13,04 Caleulate residual income (Rl for an investment centre, and descnbe some advantages and disadvantages of using Rito evaluate pertormance This documents avalate tee ochageon SEUDOCUL.COM Downloaded by Linh Ph2m Th? M? (linptm9405e@st.uel.edu.un29. Retum on investment may be improved by increasing: ‘A. east of goods sold and expenses. 8. sales margin and cost of capital C. sales revenue and cost of capital D. capital turnover or sales margin. AACSB: Reflective Ditty: Easy Leaming Objective: 12.01 Caleuate an investment centre's retum on investment (RO) 30. All the following actions will increase return on investment except: A. an increase in sales revenues. B. a decrease in operating expenses. C. a decrease in the company's invested capital D.a decrease in the number of units sold. AACSB: Reflective Diticuty: Easy LLeaming Objective: 12.01 Caleuate an investment centre's retum on investment (RO) 31. Given that return on investment measures performance over time, the invested capital would most appropriately be calculated by using: A. beginning of year assets. B. average assots. C. total assets, D. current assets. AACSB: Reflective Ditty: Easy LLeaming Objective: 13.05 Recognise tho reasons for tho various definitions of prof and iavestod capital that can be used inthe calculation of rtuen on investment and residual income 32. Which of the following measures of performance is based, in part, on weighted average cost of capital? A, Return on investment B. Capital turnover Return on sales D. Economic value added AACSB: Reflective Diticty: Easy LLeaming Objective: 13.07 Evaluate and calculate economic value added (EVAB) and shareholder value added (SVA) as measures of investment contre performance Downloaded by Linh Ph2m Th? M? (linnptm 9405c@st.uel.edu. un}33. Tentaffeld Ltd has an after tax operating income of $2.6 milion, assets totaling $8 milion and current liabilties totalling $400 000. The weighted average cost of capital is 10 per cent. What is the economic value added? A, $1 400 000 B. $1 800 000 ©. $1 840.000 D- None of the given answers AACSB: Analytical Diticuty: Easy LLeaming Objective: 13.07 Evaluate and calculate economic value added (EVAB) and shareholder value added (SVA) as messures of investment contre performance 34, ‘The following information relates to Black’s Mount Li: Total assets $6 000 000 ‘After tax operating income $900 000 Current liabilities $500 000. ‘Weighted average cost of capital 12% ‘What sits economic value added? A, $120 000 B. $180 000 ©. $240 000 D- $292 000 AACSB: Analytical Diticty: Easy LLeaming Objocive: 13.07 Evaluate and calculate economic value added (EVAB) and shareholder value added (SVA) as moasures of investment cone performance 36. Which of the following are value drivers (.. create value for the business)? i, Growth ii, Sustainability ii, Spread iv. Cost of capital Ai, liand ii Bi iiand iv C.ivliiand iv D. All of the given answers AACSB: Reflective Diticuty: Easy Leaming Objective: 13.08 Explain how shareholder value can ba measured and used to manage performance This documents avalate tee ochageon SEUDOCUL.COM Downloaded by Linh Ph2m Th? M? (linptm9405e@st.uel.edu.un36. Which of the following strategies may increase economic value added? A Increase profit as a percentage of capital employed B, Borrow additional funds and invest in assets that eam more than the weighted average cost of capital C. Sell off assets that earn more than the weighted average cost of capital. Db Increase profit as a percentage of capital employed AND borrow adaltional funds and invest in assets that earn more than the weighted average cost of capital AACSB: Reflective Diticty: Easy Leaming Objectve: 13.07 Evaluate and calculate economic value added (EVAB) and shareholder value added (SVA) as measures of investment contre performance 37, Shareholder value added may be defined as: ‘A, corporate value — market value of the company. B. corporate value ~ market value of debt. 5. corporate value — present value of liabilities. D. corporate value — current liabilities. AACSB: Reflective Ditty: Easy LLoaming Objective: 13.07 Evaluate and calculate economic value added (EVAB) and shareholder value added (SVA) a moasures of investment contre performance 38, Which of the following are, according to Herzberg, motivating factors? A. Recognition 5. Working conditions C. Relationships with colleagues D. Recognition AND working conditions ‘AACSB: Analytic Diticuty: Easy LLeaming Objective: 13.10 Desonbe the diferences between Herzberg's two-factor theory and the expectancy theory of motivation 39. Which of the following is/are, according to Herzberg, hygiene factors? ‘A, Recognition B. Working conditions, C. Relationships with colleagues ‘D. Working conditions AND relationships with colleagues ‘AACSB: Analytic Diticuty: Easy LLoaming Objective: 13.10 Desenbe the ferences betwoon Horzborg's two-factor theory and the expectancy theory of motivation Downloaded by Linh Ph2m Th? M? (linnptm 9405c@st.uel.edu. un}40. Which of the following is/are an extrinsic reward? A. Share options B. Job satisfaction C. Promotion D. Share options AND promotion AACSB: Analytic Diticuty: Easy LLeaming Objective: 13.09 Recognise the alference betwoen inrinsic and extrinsic sources of motivation 41. Which of the following is/are an intrinsic reward? A. Share options B. Job satisfaction C. Promotion D. Share options AND job satisfaction AACSB: Analytic Diticuty: Easy Leeming Objective: 13.09 Recognise the alference between inrinsic and extrinsic sources of motivation 42. Which of the following statements is/are correct when describing expectancy theory? i, The preference that an employee has for a particular reward is called valence. ii, Expectancy is the likelihood of achieving the performance necessary to earn the reward. il. An individual's perception that the effort put into a task will ead to a specific reward outcome is fundamental to expectancy theory. A.\and ii B. iiand i Cai and ii D-All of the given answers AACSB: Reflective Ditty: Easy LLeaming Objective: 13.09 Recognise the alflerence between ininsic and extrinsic sources of motivation 43, Which of the following are included in performance-related pay systems? i, Share options ii, Profit sharing ii, Team-based bonuses A. iand ii B. iand il C.iiand i D. All of the given answers AACSB: Reflective Diticty: Easy Leaming Objective: 13.14 Idenity the afarent forms of pertormance-rolated pay systems used in organisations This documents avalate tee ochageon SEUDOCUL.COM Downloaded by Linh Ph2m Th? M? (lip 9405e@st.e.ecu.n)44, Individual reward schemes have which of the following advantages? |. They relate to individual effort. ii, They reward only good performers. ii, They discourage dysfunctional competition between individuals. Avi andi Band il C.itand i D. None of the given answers AACSB: Reflective Ditty: Easy Leeming Objective: 13.11 Identity the afrent forms of pertormance-rl 1d pay systems used in organisations 45. For which of the following reasons are group pay systems often preferred to individual schemes? i, They encourage teamwork. li, They reduce dysfunctional competition between employees. |. They promote equity between employees. Aland ii 8. iland fl i and il D. All of the given answers AACSB: Reflective Diticty: Easy LLoaming Objoctve: 13.14 Identity the dforont forms of porformance-roated pay systems used in organisations 48, Which of the following may be implemented as targets for a group or company-wide performance reward scheme? i, Employee absenteeism ii. Lost-time accidents il, Customer satisfaction A. iand i B. iiand i Cand tt D. All of the given answers AACSB: Analytic Diticuty: Easy Leaming Objective: 13.11 Identity the ctfrent forms of performance-related pay systems used in organisations Downloaded by Linh Ph2m Th? M? (linnptm9405e@st.ue.edu.un}47. Sunrise Dairies has a return on investment of 15 per cent. A Sunrise division, which currently has a return on investment of 13 per cent and $750 000 of residual income, is contemplating a large investment that will (1) reduce divisional return on investment and (2) produce residual income of $120 000. If Sunrise strives for goal congruence, the investment: ‘A. should not be approved because it reduces divisional retum on investment. BB. should not be approved because the division's return on investment is less than the corporate return on investment before the investment is considered. . should be approved because it produces $120 000 residual income for the division. D. should be approved because, after acquisition, the division's return on investment and residual income are both positive numbers. AACSB: Analytic Diticuty: Easy Leaming Objective: 13.03 Explain how the negative behavioural incentives associaled with using return on investment fo evaluate performance can be minimised Leaming Objective: 13.04 Caleuateresisual income (Rl) for an investment centre, and describe some advantages and disadvantages of using Rito evaluate performance 48, The Fitzroy division of Brisbane Enterprises has negative residual income of $540 000. Fitzroy's management is considering an investment opportunity that will duce this negative amount to $400 000. The investment. ‘A, should be pursued because itis attractive from divisional and corporate perspectives. B, should be pursued because itis attractive from a divisional perspective although not from a corporate perspective. C. should be pursued because itis attractive from a corporate perspective, although not from a divisional perspective. D. should not be pursued because itis unattractive from a divisional perspective although its attractive from a corporate perspective. ‘AACSB: Analytic Diticty: Easy LLoaming Objective: 13.04 Caleuate resis income (RI for an investment conto, and desenbe some advantages and disadvantages of using Rito evaluate performance This documents avalate tee ochageon SEUDOCUL.COM Downloaded by Linh Ph2m Th? M? (linnptm9405e@st.ue.edu.un}49. (p. 611) Carlton ision 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? Consistent with numbers on the balance sheet Produce a rising retum on investment over time A Yes Yes B. No Yes c. No No D. Yes Need more information to judge Ditty: Medium LLeaming Objective: 13.05 Recognise the reasons forthe various definitions of prof and invested capital that can be used inthe calculation of retumn on Jnvostment and residual income’ 50. The income calculation for a divisional manager's return on investment should be based on: A. divisional contribution margin. B, profit margin controllable by the divisional manager. C. profit margin traceable to the division. D. division income before interest and income tax, AACSB: Reflective Diticuty: Easy LLeaming Objective: 13.01 Caleuate an investment centre's retum on investment (RO) 51. Which of the following is used in the calculation of both return of A, Total shareholders equity B. Retained earnings, C. Invested capital D. Cost of capital jestment and residual income? AACSB: Reflective Diticty: Easy LLeaming Objective: 13.04 Caleuate resi income (RI) or an investment centre, and descnbe some advantages and disadvantages of using Rl fo evaluate performance LLeaming Objective: 13.07 Evaluate and calculate economic valve added (EVAB) and shareholder value added (SVA) as measures of investment centre performance Downloaded by Linh Ph2m Th? M? (linnptm 9405c@st.uel.edu. un}52. Which of the following statements is/are false? |. Return on investment encourages managers to take a long-term view of corporate performance. ii, Retum on investment may encourage managers to defer the replacement of worn assets. ii, Return on investment may encourage managers to increase expenditure on research and development. A iand ii B. itand il Cai and ii D. All of the given answers AACSB: Reflective Ditty: Medium LLeaming Objective: 13.02 Desenbe some advantages and limitations of RO! as @ measure of performarc of investment centres 53. A division of a firm has a net profit of $640 000 before imputed interest and a residual income of $240 000. Ifa rate of 10 per cent is used to compute imputed interest, calculate the division's retum on investment (rounded to a whole number) A. 4% B, 10% ©. 16% D. 35% AACSB: Analytical Diticuty: Easy Leaming Objective: 13.01 Caleuate an investment centre's ratum on investment (RO) Loaming Objocive: 13.04 Calculate resis income (Ror an investmont conto, and desenbe some advantages and disadvantages of using RI to evaluate performance 54, Which of the following items do not form part of the economic value added calculation? A, Weighted average cost of capital B, Book value of equity C. Market value of equity D- Income tax rate AACSB: Reflective Diticuty: Easy LLeaming Objective: 13.07 Evaluate and calculate economic value added (EVAR) and shareholder value added (SVA) as measures of investment contre performance This documents avalate tee ochageon SEUDOCUL.COM Downloaded by Linh Ph2m Th? M? (linnptm9405e@st.uel.edu. un56, Richard's Division of Richard and Sons has the folowing data related to a particular period: Average invested capital $700 000 Imputed interest rate 10% Revenues $1900 000 Verieble costs $1 150000 Fixed costs related colely to the division $673.00 Calculate the amount of residual income for the period A. $70 000 B. $7000 ©. $77 000 D. $680 000 AACSB: Analytical Diticuty: Easy LLeaming Objective: 13.07 Evaluate ad calculate economic value added (EVAB) and shareholder value added (SVA) as measures of investment contre performance 56, Richard's Division of Richard and Sons has the following data related to a particular period: Average invested capital $700 000 Imputed interest rate 10% Revenues $1900 000 Variable costs $1 150 000 Fixed costs related solely to the division $673 000 Calculate the return on investment for the period. A.11% B. 10% 0.4% D. Always the same as the imputed interest rate AACSB: Analytical Diticuty: Easy Lleaming Objective: 13.04 Calculate an investment centre's retum on investment (RO) Downloaded by Linh Ph2m Th? M? (lint OSc@stueledusn)97. Richard's Division of Richard and Sons has the following data related to a particular period: Average invested capital $700 000 Imputed interest rate 10% Revenues $1900 000 Variable costs $1 150 000 Fixed costs related solely to the division $673 000 Calculate the return on sales for the period. A4% 511% C.40% 2.04% AACSB: Analytical Ditty: Easy Loaming Objoctve: 13.03 Calculate an investment centre's rotum on investmont (RO!) 58, Richard's Division of Richard and Sons has the following data related to a particular period: Average invested capital $700 000 Imputed interest rate 10% Revenues $1,900 000 Variable costs $1 150000 Fixed costs related solely to the division $673 000 Calculate the investment turnover (rounded) for the period A, 0.37 times B. 11 times 0.11 times 27 times AACSB: Analytic Ditty: Easy Leaming Objecive: 13.01 Caleuate an investment centre's ratum on investment (RO!) This documents avalate tee ochageon SEUDOCUL.COM Downloaded by Linh Ph2m Th? M? (inhptm9405e@2st. ue ed. yn)59. Which of the following items will be most relevant in determining the imputed interest rate for the purposes of calculating residual income? A, Final net profit B. Return on investment Investment turnover D. Riskiness of investments undertaken AACSB: Analytical Diticuty: Easy Leaming Objective: 13.04 Calculate resiual income (Ri for an investment centre, and describe some advantages and disadvantages of using Rl to evaluate performance 60. The return on investment of a division will increase if the division is able to: A. increase retum on sales and increase investment tumover. B. increase retum on sales or increase investment turnover. C. increase sales revenue and decrease asset turnover. D. increase retum on sales and/or increase investment tumover. AACSB: Analytical Ditty: Easy Leaming Objective: 13.01 Caleuate an investment centre's retum on investment (ROI) 61, Jasmine Dimm is a call centre manager for Tostra, a mobile phone company. Call centre operators at her call centre are responsible for answering calls from Tostra customers. Some calls are very short, relating to simple enquiries. However, a majority of calls tend to be longer, coming from irate customers complaining about Tostra's services. In these calls, customers are often very emotional and sometimes even abusive. Call operators have no control aver what types of calls they get. Jasmine has developed a new incentive system for her call centre staff. Under the new system, call centre operators are rewarded if they achieve two performance targets: (1) the duration of 90 per cent of the calls is less than 4 minutes and (2) 80 per cent of customers rate Tostra's ‘customer service quality’ as ‘excellent’. Achieving these two monthly performance targets will result in a bonus worth 20 per cent of the call operator's monthly salary. Based on expectancy theory, the major limitation(s) of Jasmine’s reward system is: A the incentive system lacks valence and instrumentality. B. the incentive system lacks expectancy. the incentive system lacks instrumentality. . the incentive system lacks expectancy and instrumentality. AACSB: Reflective Ditty: Mechurn Leaming Objecive: 13.10 Describe the diferences between Herzbery's two-factor theory and the expectancy theory of motivation Downloaded by Linh Ph2m Th? M? (linnptm 9405c@st.uel.edu. un}62. Jasmine Dimm i a call centre manager for Tostra, a mobile phone company. Call centre operators at her call centre are responsible for making sales calls to customers to promote Tostra's new products. Jasmine sets two performance targets for her operators: sales and average call duration. Every 6 months, any call centre operator who can achieve both targets goes into a random draw with a one-in-ten chance of winning a $50 supermarket giftcard. Al her call contre operators agree that these two targets are clearly specified, objectively measured and achievable with hard work. However, the call centre operators are stil unhappy with the new incentive system. According to the expectancy theory, this is because: AA. the incentive system lacks valence and instrumentality 5 the incentive system lacks expectancy C. the incentive system lacks expectancy and valence. D. the incentive system lacks expectancy and instrumentality. AACSB: Reflective Diticuty: Meum LLeaming Objective: 13.10 Desonbe the diferences between Herzborg’s two-factor theory and the expectancy theory of motivation 63, [A group-based reward system is appropriate when: |-team work is important and employees need to work together to achieve organisational goals. iit is easy to see individuas effort and performance. il itis important to discriminate between good performers and bad performers. Ai Biand ii Cui and ii D.itand i AACSB: Reflective Ditty: Easy Leaming Objective: 13.12 Outine the advantages and disadvantages associated with group vorsus individual rewards 64, Which of the following information is required to compute SVA (shareholder value added)? i. PV of cash flows from operations for a certain time period ii Residual value of the business Ili EVA (economic value added) Auiand ii Band il Ci, and il Dai AACSB: Reflective Diticuty: Easy Leaming Objective: 13.07 Evaluate and calculate economic value added (EVAS) and shareholder value added (SVA) as measures of investment cone performance This documents avalate tee ochageon SEUDOCUL.COM Downloaded by Linh Ph2m Th? M? (linptm9405e@st.uel.edu.un65, Which of the following is a key difference between EVA and residual income? A. The weighted average cost of capital is used to calculate EVA, but not necessarily for residual income. B. Net profit is used to calculate residual income but is irrelevant for EVA. C. EVA has a long term focus, but residual income has a short term focus. D. There is no difference between EVA and residual income. AACSB: Reflective Ditty: Easy Leaming Objective: 13.07 Evaluate performance 1nd calculate economic value added (EVAB) and shareholder value added (SVA) as measures of investment centro 66, ‘The following information is avallabe for dite Lt Cost of debt before tax 10% Cost of debt after tax % Cost of equity 12% Market value of debt $5 500 000 Market value of equity $4500 000 Tax rate 30% The WACC for Jit Ltd is: AT8% AACSB: Analytic! Ditty: Easy LLeaming Objecive: 13.07 Evaluate and calculate economic value added (EVAB) and shareholder value added (SVA) as measures of investment conire performance ownloaded by Linh Ph?m Th? M0? (linnptm1940Se@st uel edu vr)67. ‘The following information is available for Nettie Lt Cost of debt before tax 10% Cost of equity 12% Market value of debt $4000 000 Market value of equity $6 000 000 The company tax rate is 30 per cent. WACC is: A 11.2% B. 10% C7.8% 2.9.5% AACSB: Analytical Ditty: Meat LLeaming Objective: 13.07 Evaluate and calculate economic value added (EVAB) and shareholder value added (SVA) as measures of investment contre performance 68, Value-based management refers to: A. a framework for applying EVA to all business decisions. B. a framework for making key business decisions that add economic value to the business. Ca philosophy that management should focus on creating customer value. D. a valuation technique that uses discounted cash flows to estimate imputed cost of capital AACSB: Reflective Diticuty: Easy LLeaming Objective: 13.08 Explain how shareholder value can be measured and used to manage performance 69. Which of the following statements about developing reward system is incorrect? A, The key benefit of a profit sharing plan is to encourage employees to think like owners. B. The key benefit of gain sharing plan is to introduce equity, ensuring the employees who contribute to the business can get a share of the gains G. The key benefit of an employee share plan is to reduce free-riding problems. : The key benefit of an individual-based incentive system is to highlight improved expectancy and instrumentality. AACSB: Reflective Ditty: Medium LLeaming Objective: 13.11 Identity the dtfrent forms of pertormance-related pay systems used in organisations This documents avalate tee ochageon SEUDOCUL.COM Downloaded by Linh Ph2m Th? M? (linnptm9405e@st.uel.edu. un70. Braham Farms has a retum on investment of 15 per cent. A Braham division, which currently has a return on investment of 13 per cent and $375 000 of residual income, is contemplating a large investment that will (1) reduce divisional return on investment and (2) produce residual income of $60 000. If Braham strives for goal congruence, the investment: A. should not be approved because it reduces divisional retum on investment. BB. should not be approved because the division's return on investment is less than the corporate return on investment before the investment is considered. . should be approved because it produces $60 000 residual income for the division. D. should be approved because, after acquisition, the division's return on investment and residual income are both positive numbers. AACSB: Analytic Diticuty: Easy Leaming Objective: 12.03 Explain how the negative behavioural incentives associaled with using relurn on investment fo evaluate performance can be minimised Leaming Objective: 13.04 Calewateresiual income (Rl for an investment centre, and describe some advantages and disadvantages of using Rito evaluate performance 71, 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: A. competence. B. progress, C. meaningfulness, D. choice, AACSB: Reflective Dicuty: Medium LLeaming Objective: 13.08 Explain how reward systems can be designed and used to enhance goal congruence 72, When employees have the opportunity in the larger scheme of things, to pursue a task that they consider worthy, this, has been identified (Robbins et al., 2004; Thomas, 2000) as: ‘A. competence. B. progress. C. meaningfulness. D. choice. AACSB: Reflective Diticaty: Medium Leaming Objecive: 13.08 Explain how reward systems can be designed and used to enhance goa! congruence 73, Which of the following would be considered an advantage of a group scheme? A. Equity among employees , Rewarding only good performers C. Competitiveness between employees D. Individual identification AACSB: Reflective Ditty: Easy Leaming Objective: 13.12 Outine the advantages and disadvantages associated wih group versus individual rowards Downloaded by Linh Ph2m Th? M? (linnptm9405e@st.tel.edu.xn)74, Under a deferred payment incentive schemes managers are likely to: ‘A. maximise short-term profi. BB, focus on short-term plans. C. maximise medium and long-term profits. D. strive for short-term performance. AACSB: Reflective Ditty: Easy LLeaming Objective: 13.13 Recognise the importance of the requency and timing of Ihe payment of incentive payments fo enhance motivation and performance 75, Providing an employee incentive scheme that offers more frequent and timely incentives wil A. discourage employees from making performance targets. B. continually motivate employees. C-not impact on an employee's performance. . provide no indication of an employee's target achievements. AACSB: Reflective Ditty: Medium Loaming Objoctve: 13.13 Recognise the Importance of the frequency and ting ofthe payment of incentive payments to enhance motivation and performance 76. Jasmine Dimm is a call centre manager for Tostra, a mobile phone company. Call centre operators at her call centre are responsible for answering calls from Tostra customers. Some calls are very short, relating to simple enquiries, However, a majority of calls tend to be longer, coming from irate customers complaining about Tostra's services. For these calls, customers are often very emotional and sometimes even abusive. The call centre operators are only responsible for documenting the complaints and are generally unable to solve the problems for the customers. Jasmine has developed a new reward system for her call centre staff. Under the new system, call centre operators are rewarded with a substantial bonus (20 per cent of annual salary) if they achieve two performance targets: (1) a target set fon average call duration; and (2) a target based on ‘customer service quality’. While the call centre operators working for Jasmine all agree that these performance targets are reasonable, they are unhappy with Jasmine's overbearing personality. Many operators are also experiencing a lot of stress when dealing with rude customers. Discuss the limitations of Jasmine's new reward system, using the concept of intrinsic motivation and extrinsic motivation, Extrinsic motivations are derived from outside of the individual. Intrinsic motivations are derived from the interests and enjoyment at work, Jasmine’s reward system focuses only on extrinsic rewards, namely the substantial financial bonuses. However, because of Jasmine’s overbearing personality, itis likely employees do not feel happy or satisfied working tunder her, Answering calls from complaining customers are not likely to result in job satisfaction, especially if there is nothing the operator can do to solve customers’ problems. Thus, the work is unlikely to be meaningful and intrinsic motivation will be low. AACSB: Communication Ditty: Hora Leaming Objective: 13.09 Recognise the alference betwoen ininsic and extrinsic sources of motation This documents avalate tee ochageon SEUDOCUL.COM Downloaded by Linh Ph2m Th? M? (linhptm 9405e@st.ue.edu. un}77. Identify and describe two advantages and two limitations of using return on investment (RO!) to evaluate the performance of investment centres. ‘The Advantages of RO! Retum on investment is used by many decentralised businesses to evaluate the performance of investment centres. It has some positive features: 1. Itencourages managers to focus on both profits and the assets required to generate those profits. Thus, managers of investment centres must consider the relationships between profts and invested capital. It discourages excessive investment in assets, which may ‘occur if performance is measured only on absolute profit It also encourages managers to focus on increasing revenue and reducing costs. 2, Retum on investment can be used fo evaluate the relative performance of investment contres, even when those business units have different scales of operations. Thus, we can compare the ROI of a small business with that of a large business. ‘THE LIMITATIONS OF ROI ‘Against these advantages, a significant emphasis on achieving RO! can lead to dysfunctional decisions: 1. Itcan encourage managers to focus on short-term financial performance, at the expense of the long term. Many ways of inereasing ROI can result in reduced performance in the future, Excessive cost-cutting activiies can improve profil, and hence short-term ROI, but ‘weaken future profits and the business's future competitiveness. For example, research and development, or training expenditure, can be deferred, Reducing employee numbers can increase proft but may affect product quality or the level of customer service, 2, Relurn on investment can encourage managers to defer asset replacement. Asset replacement may be deferred (particularly when those old assets are fully depreciated), as the purchase of new assets would boost the size ofthe invested capital, Deferring the replacement of assets may improve ROI in the short term, but erode the competitiveness and profis ofthe business in later years. Disposing of productive assets can decrease the investment base and increase ROI, but also reduce the capacity ofthe business and future profiis/ROI. These problems are partially caused by the way in which assets are measured in the ROI calculation. 3, Relumn on investment may discourage managers from investing in projects that are acceptable from the total organisation's point of view. This will occur when the project decreases the investment centre's ROI. AACSB: Communication ‘AACSB: Reflective Diticuty: Medurn LLeaming Objective: 13.02 Desonbe some advantages and limitations of RO! as @ measure of performance of investment cents 78. Discuss three ways that the problems associated with using Retum on Investment (RO!) can be minimised. ‘The problems associated with RO! can be minimised in the following ways. 41. Using ROI as only one of a series of performance measures that focus on both short-term and long-term performance, This approach is taken by many companies. A more balanced set of measures (both financial and non-financial) can counter the dysfunctional incentives associated with ROI. 2. Considering alternative ways of measuring invested capital, so that the replacement of an asset is less likely to result in a reduction of ROI. Many businesses measure invested capital at its carrying amount, which is often low at the time of asset replacement. If alternative measures of invested capital, such as market value or replacement cost, are used, the replacement decision will not cause a major change in the investment base. 3. Using alternative financial measures, such as residual income or economic value added, AACSB: Communication ‘AACSB: Reflective Diticty: Easy LLoaming Objoctve: 13.03 Explain how tho negative behavioural incentives associated with using return on investment fo evaluate performance can be ‘minimised Downloaded by Linh Ph2m Th? M? (linptm9405e@st.tel.edu.xn)79. When measuring profit and invested capital, managers have to decide how they will define what will be included in invested capital, then apply that definition consistently throughout the one organisation. Identify and explain with an example, the three definitions of invested capital that can be applied, Exhibit 19.1 shows that the Smelting business had balances at the end of the financial year of $186 milion in current assets; $700 million in non-current assets such as plant and equipment; and $15 millon tied up in a plant under construction. In addition, the balance ‘of current labilties was $110 milion “There are several ways of defining ‘invested capital Total assets. This measure of invested capital is appropriate if the investment centre manager is responsible for decisions about all of the assets ofthe iavestment centre, including non-productive assets. Total productive assets. In some companies, investment centre managers may be directed by corporate management to retain non- productive assets such as vacant land or construction in progress. In such cases itis appropriate to exclude these non-productive assets from the measure of invested capital. Under this ateative, $885 milion would have been used in the ROI and residual income calculations (total assets of $200 milion loss $15 million for the plant under construction), Total assets less current labiltes. In some companies, managers in investment cenires manage certain short-term labiltes, including short-term bank loans and employee entitlements such as the provision for long-service leave. In these cases, invested capital can be measured as total assets less current lables. This approach encourages the managers to minimise resources tied up in assets and to manage the use of short-term credit to finance operations. If this approach had been used by the Smelting business, the invested capital would have been $790 milion (total assets of $900 milion less current liabilities of $110 milion). AACSB: Analytical ‘AACSB: Communication ‘AACSB: Refectve Diticuty: Medurn LLeaming Objective: 13.05 Recognise the reasons forthe various definitions of prof and invested capital that can be used inthe calculation of retuen on Jnvestment and residual income. This documents avalate tee ochageon SEUDOCUL.COM Downloaded by Linh Ph2m Th? M? (inp 9405e@st.tel.edu.xn)80. 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. When organisations use shareholder value analysis to manage thelr business, they are said to be practising value-based management (VBM), which is a framework for making key business decisions that add economic value to the business. A particular strategy or ‘decision creates shareholder value, where the return on capital is greater than the cost of capital. Thus, managers need to understand how to generate, evaluate and select business strategies, or undertake activities that will increase the value ofthe firm. This involves being able to measure the value created from decisions, such as whether to acquire a new business or move into new markets. Product lines or business units that are not providing sufficient value may be deleted, and the outcomes of a proposed project or asset acquisition can be analysed in terms of value creation. ‘There are four aspects of VBM: valuation, strategy, finance and corporate governance (Morin & Jarrell, 2001), Valuation Value can be measured in several ways. Discounted cash flow (OCF) models are commonly used to measure value, The use of OCF to measure shareholder value makes sense, as investors and the capital markets often value a business based on the discounted future cash flows of the business. In some casas, however, itis difficult to measure such cash flows, so surrogates may be used. For example, the market capitalisation of the company-—that is, the market price per share multiplied by the number of shares on issue— may be used. To increase the value of a fim, managers need to understand the drivers of value. Value drivers are the activities or actions that create value for a business. These drivers include ‘spread, which is the degree to which a firm can eam a retum that is greater than its cost of capital growth in funds available to invest in value-creation activities; sustainability of those funds over many years; and cost of capita The frst three drivers increase cash flow, which interacts with the cost of capital to increase shareholder value, Strategy, finance and corporate governance The other three aspects of VBM are strategy, finance and corporate governance. Strategic decisions have a substantial and continuing Impact on the value of a business. Valuation techniques can assist managers to compare the value created by alternative differentiation ‘F cost strategies. Financial policies, such as the adoption of particular financial and capital structures that reduce the cost of capital, will also influence value creation Corporate governance involves selecting and implementing systems that contribute to value creation. Performance measures can be developed to measure the value-creating performance of business units and managers. Managerial reward systems can be designed to link managers’ compensation to their performance in creating value, as well as to guide managers’ value creation activities. AACSB: Communication ‘AACSB: Reflective Diticuty: Hard Leaming Objective: 13.06 Explain how shareholder value can be measured and used to manage performance 81. Motivation of staff is a key factor in a company achieving their goals and ensuring goal congruence. TRUE AACSB: Reflective Diticuty: Easy LLeaming Objective: 13.09 Recognise the alference between ininsic and extrinsic sources of motivation 82, Invested capital can be defined as net assets, total assets, productive assets or working capital FALSE AACSB: Reflective Diticuty: Modu LLeaming Objective: 13.05 Recognise the reasons forthe various defntios of proft and invested capital that can be used inthe caleultion of return on investment and residual income. Downloaded by Linh Ph2m Th? M? (inp 9405e@st.tel.edu.sn)83. When using residual income, some companies prefer to use the weighted average cost of capital as a basis for determining the imputed interest charge. TRUE AACSB: Reflective Diticuty: Easy Leaming Objective: 13,04 Caleuate resi income (Rl) for an investment centre, and descnbe some advantages and disadvantages of using Rito evaluate performance 84. Companies using value-based management operate within a framework of making key decisions that add economic value to the business. TRUE AACSB: Reflective Ditty: Ea LLeaming Objective: 13.07 Evaluate and calculate economic value added (EVAB) and shareholder value added (SVA) as measures of investment cenire performance 85, The formula for economic value added and the residual income are interchangeable. FALSE AACSB: Reflective Ditty: Easy Leaming Objectvo: 13.07 Evaluate and calculate economic value add (EVAB) and shareholder value added (SVA) as moasures of invostmont contre performance 86. Gainsharing is one system companies can use to distribute cash bonuses to employees when the performance of their segment outperforms the set target. TRUE AACSB: Reflective Ditty: Ea Leaming Objective: 13.11 Idontty th otfrent forms of pertormance-roated pay systems used in organisations 87. One of the main advantages of return on investment is that it can be used with some responsibility centres to evaluate performance. TRUE AACSB: Reflective Diticuty: Easy LLeaming Objective: 13.02 Describe some advantages and limitations of RO! as a measure of performance of investment contos 88, Expectancy theory relates employee motivation to valence, expectancy and instrumentality TRUE AACSB: Refiectve Diticty: Easy Leaming Objective: 13.09 Recognise the alference between ininsic and extrinsic sources of motivation This documents avalate tee ochageon SEUDOCUL.COM Downloaded by Linh Ph2m Th? M? (linnptm9405e@st.uel.edu. un89. Designing incentive schemes systems is an easy process and is a definite way of ensuring goal congruence. FALSE AACSB: Reflective Ditty: Easy LLeaming Objective: 13.08 Explain how roward systoms can be designed and used to enhance goal congruonco 90. Retum on equity and investment tumover are the components of the expanded return on investment [ROI] formula that enables management to identify ways of improving the RO! FALSE AACSB: Reflective Diticuty: Easy LLeaming Objective: 13.01 Caleuate an investment centre's retum on investment (ROI) 91. The imputed interest rate is the firm's required rate of return. TRUE AACSB: Reflective Diticuty: Easy LLeaming Objective: 13.04 Caleuateresiua income (Ri for an investment centre, and describe some advantages and disadvantages of using Rl to evaluate performance 92, Value drivers are the activities or actions that decrease value for a business. FALSE AACSB: Reflective Ditty: Easy Leaming Objective: 13.08 Explain how shareholder valve can be measured and used to manage performance 93, According to Herzberg's two-factor theory, the degree to which the outcome satisfies the individual's goals, and the attractiveness of the reward for the individual is known as valence. TRUE AACSB: Reflective Diticuty: Easy LLeaming Objective: 13.10 Desonbe the diferences between Herzborg's two-factor theory and the expectancy theory of motivation Downloaded by Linh Ph2m Th? M? (linnptm19405e@st.uel.edu.un}