Question : 17) Stock options give executives the right to buy company : 1212024

17) Stock options give executives the right to buy company stock at a specified price, called the exercise price, within a specified period.

18) Craylon Corp. is planning the 2015 operating budget. Average operating assets of $1,800,000 will be used during the year and unit selling prices are expected to average $100 each. Variable costs of the division are budgeted at $500,000, while fixed costs are set at $300,000. The company’s required rate of return is 18%.

Required:

a.Compute the sales volume necessary to achieve a 20% ROI.

b.The division manager receives a bonus of 50% of residual income. What is his anticipated bonus for 2015, assuming he achieves the 20% ROI from part (a)?

19) LaserLife Printer Cartridge Company is a decentralized organization with several autonomous divisions. The division managers are evaluated, in part, on the basis of the change in their return on invested assets. Operating results for the Packer Division for 2015 are budgeted as follows:

Sales

$5,000,000

Less variable costs

2,500,000

Contribution margin

2,500,000

Less fixed expenses

1,800,000

   Net operating income

$ 700,000

Operating assets for the division are currently $3,600,000. For 2015, the division can add a new product line for an investment of $600,000. The new product line will generate sales of $1,600,000 and will incur fixed expenses of $600,000 annually. Variable costs of the new product will average 60% of the selling price.

Required:

a.What is the effect on ROI of accepting the new product line?

b.If the company’s required rate of return is 6% and residual income is used to evaluate managers, would this encourage the division to accept the new product line? Explain and show computations.

20) Capital Investments has three divisions. Each division’s required rate of return is 15%. Planned operating results for 2015 are as follows:

Division

Operating income

Investment

A

$15,000,000

$100,000,000

B

$25,000,000

$125,000,000

C

$11,000,000

$ 50,000,000

The company is planning an expansion, which will require each division to increase its investments by $25,000,000 and its income by $4,500,000.

Required:

a.Compute the current ROI for each division.

b.Compute the current residual income for each division.

c.Rank the divisions according to their current ROIs and residual incomes.

d.Determine the effects after adding the new project to each division’s ROI and residual income.

e.Assuming the managers are evaluated on either ROI or residual income, which divisions are pleased with the expansion and which ones are unhappy?

21) Vega Corp’s corporate income has declined to unacceptable levels. To change the direction of the company, the board of directors hired a new chief executive officer. She is currently considering three alternative ways to reward division managers for performance. They are:

1.Give each manager a competitive salary with no bonus for performance.

2.Give each manager a base salary with the largest portion being a bonus based on performance, ROI being the yardstick.

3.Give each manager a base salary with a bonus based on comparative performance with the other divisions.

Required:

Evaluate each of the ideas, giving strengths and weaknesses.