61. Portia Products Inc. has been asked by its shareholders to calculate the economic value added (EVA) for the current year. Portia’s controller has the following information available:
Before-tax profit
$6,000,000
Total assets
10,000,000
Current liabilities
2,000,000
Average interest rate on debt
10%
Average tax rate
40%
The company’s EVA is: A. $1,600,000B. $5,200,000C. $2,800,000D. $2,400,000
62. Donnelly Inc. has been asked by its shareholders to calculate the economic value added (EVA) for the current year. Donnelly’s controller has the following information available:
Before-tax profit
$5,000,000
Current assets
2,000,000
Long-term assets
4,000,000
Current liabilities
900,000
Long-term liabilities
3,500,000
Average interest rate on debt
10%
Average tax rate
40%
The company’s EVA is: A. $1,490,000B. $2,890,000C. $2,840,000D. $2,490,000
63. When comparing two different investment alternatives, which of the following measures for each alternative would be the best to use? A. Return on investmentB. Residual incomeC. Net incomeD. Contribution margin ratio
64. Grayson & Sons, a local car dealership, has three separate divisions: car repair, new car sales, and used car sales. The company has decided to implement a new system for evaluating the performance of its three division managers and the bonuses they receive. The following information is available with respect to each division for the current year:
Car Repair
New Car Sales
Used Car Sales
Operating income
$ 2,000,000
$ 8,000,000
$ 3,000,000
Operating assets
3,000,000
18,000,000
8,000,000
In order to receive a bonus, a division manager must have an ROI greater than 50% and residual income in excess of $1,400,000. If management uses a minimum required rate of return of 18%, which division manager(s) would be eligible to receive a bonus? A. Car repair onlyB. New car onlyC. Used car onlyD. Car repair, new car, and used car
65. Which of the following situations is most likely to pose a problem for companies that use return on investment (ROI) as a measure of a manager’s performance? A. Managers may be encouraged to purchase more operating assets than they otherwise should.B. Managers may be discouraged from purchasing operating assets that could improve overall profitability.C. Managers may be discouraged from reducing their division’s costs.D. Managers may be discouraged from paying off debt in order to reduce interest costs.
66. Which of the following forms of manager compensation most likely encourages managers to take a long-term view of how their performance ties in with the long-term goals of a company? A. Year-end cash bonusB. Base salaryC. Stock optionsD. Use of a company car
67. Which of the following statements about managerial compensation is correct? A. Compensating managers with year-end cash bonuses always motivates managers to do what is best for the company as a whole.B. From a manager’s standpoint, cash compensation is always preferable over stock-based compensation.C. Manager compensation should always be either cash-based or stock-based.D. Stock-based manager compensation does not guarantee a future cash benefit to managers.
68. Which of the following statements about stock-based managerial compensation is correct? A. It may cause dysfunctional behavior in the short-run as managers try to drive up the company’s stock price.B. Exercising the option as soon as it is granted will leave the manager better off from a cash standpoint.C. Stock options are always guaranteed to increase in value over time.D. Managers always prefer to receive stock options instead of year-end bonuses.
69. “Transfer pricing” refers to: A. the price charged when a company sells to its employees.B. the price charged when a company sells to its customers.C. the price charged when one division sells to another division.D. the price charged when a company sells to a stockholder.
70. The most important goal of transfer pricing should be to: A. maximize the goals of the buying division.B. maximize the goals of the selling division.C. maximize the goals of the employees working in those divisions.D. maximize the goals of the company as a whole.
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