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Review

Use the following to answer the following five questions

Selected data from Chering Co.'s accounting records revealed the following:

Sales $825,000

Average investment $440,000

Net income $ 66,000

Minimum rate of return 14%

Chering Co.'s return on investment is calculated to be:

A) 6.0%.

B) 8.0%.

C) 14.0%.

D) 15.0%.

E) 20.0%.

Review

Use the following to answer the following five questions

Selected data from Chering Co.'s accounting records revealed the following:

Sales $825,000

Average investment $440,000

Net income $ 66,000

Minimum rate of return 14%

Chering Co.'s return on investment is calculated to be:

A) 6.0%.

B) 8.0%.

C) 14.0%.

D) 15.0%. ($66,000/$440,000)

E) 20.0%.

Review

Chering Co.'s return on sales is calculated to be:

A) 6.0%.

B) 8.0%.

C) 14.0%.

D) 15.0%.

E) 20.0%.

Review

Chering Co.'s return on sales is calculated to be:

A) 6.0%.

B) 8.0%. ($66,000/825,000)

C) 14.0%.

D) 15.0%.

E) 20.0%.

Review

Chering Co.'s asset turnover is calculated to be:

A) 1.07.

B) 1.63.

C) 1.88.

D) 4.27.

E) 12.50.

Review

Chering Co.'s asset turnover is calculated to be:

A) 1.07.

B) 1.63.

C) 1.88.($825,000/$440,000)

D) 4.27.

E) 12.50.

Review

Chering Co.'s residual income is calculated to be:

A) $ 4,400.

B) $ 8,800.

C) $ 9,240.

D) $22,380.

E) $49,500.

Review

Chering Co.'s residual income is calculated to be:

A) $ 4,400. [$66.000 -(440,000 x .14)]

B) $ 8,800.

C) $ 9,240.

D) $22,380.

E) $49,500.

Review

If the minimum rate of return was 13%, Chering Co.'s residual income would calculate to be:

A) $ 4,400.

B) $ 8,800.

C) $ 9,240.

D) $22,380.

E) $49,500.

Review

If the minimum rate of return was 13%, Chering Co.'s residual income would calculate to be:

A) $ 4,400.

B) $ 8,800. [$66,000 – ($440,000 x .13)]

C) $ 9,240.

D) $22,380.

E) $49,500.

Review

Which of the following is NOT an example of a benefit?

A) Free travel arrangements.

B) A bonus based on achieving performance goals.

C) Life insurance for family members.

D) Tickets to entertainment events.

Review

Which of the following is NOT an example of a benefit?

A) Free travel arrangements.

B) A bonus based on achieving performance goals.

C) Life insurance for family members.

D) Tickets to entertainment events.

Review

Of the three basic forms of management compensation (salary, bonus, perks), the fastest growing part of the total compensation is:

A) salary.

B) bonus.

C) perks.

D) salary and bonus.

E) They are all growing at the same rate.

Review

Of the three basic forms of management compensation (salary, bonus, perks), the fastest growing part of the total compensation is:

A) salary.

B) bonus.

C) perks.

D) salary and bonus.

E) They are all growing at the same rate.

Review

The three most common bases of compensation are ________, strategic performance measures, or the balanced scorecard.

A) Allocated costs.

B) Sales.

C) Stock price.

D) Turnover ratio.

Review

The three most common bases of compensation are ________, strategic performance measures, or the balanced scorecard.

A) Allocated costs.

B) Sales.

C) Stock price.

D) Turnover ratio.

Review

Which of the following bonus payment options tends to be short-term focused?

A) Current bonus

B) Deferred bonus

C) Stock options

D) Performance shares

Review

Which of the following bonus payment options tends to be short-term focused?

A) Current bonus

B) Deferred bonus

C) Stock options

D) Performance shares

Review

The ideal compensation plan would make all company contributions to the plan immediately tax-deductible and all tax consequences for managers:

A) non-existent.

B) insignificant.

C) deferred or avoidable.

D) limited, but current.

E) limited, but pre-paid.

Review

The ideal compensation plan would make all company contributions to the plan immediately tax-deductible and all tax consequences for managers:

A) non-existent.

B) insignificant.

C) deferred or avoidable.

D) limited, but current.

E) limited, but pre-paid.

Review

Which of the following compensation plans is never taxed to the manager?

A) Salary

B) Stock options - nonqualified plan

C) Stock options - qualified plan

D) Certain retirement plans

E) Other perks

Review

Which of the following compensation plans is never taxed to the manager?

A) Salary

B) Stock options - nonqualified plan

C) Stock options - qualified plan

D) Certain retirement plans

E) Other perks

Review

"Market value" is an objective measure that clearly shows what:

A) the firm's accountant determines as the firm's worth to be.

B) investors think the firm is worth.

C) stock analysts calculate as the firm's worth.

D) is the sales value of the firm.

E) is the liquidation value of the firm.

Review

"Market value" is an objective measure that clearly shows what:

A) the firm's accountant determines as the firm's worth to be.

B) investors think the firm is worth.

C) stock analysts calculate as the firm's worth.

D) is the sales value of the firm.

E) is the liquidation value of the firm.

Review

Which of the following is NOT a key measure of liquidity?

A) Current ratio.

B) Cash flow ratio.

C) Inventory turnover.

D) Gross margin percent.

Review

Which of the following is NOT a key measure of liquidity?

A) Current ratio.

B) Cash flow ratio.

C) Inventory turnover.

D) Gross margin percent.

Review

Which of the following is NOT a method for valuing a firm?

A) Balanced scorecard method

B) Market value method

C) Book value method

D) The discounted cash flow method

E) Multiples based method

Review

Which of the following is NOT a method for valuing a firm?

A) Balanced scorecard method

B) Market value method

C) Book value method

D) The discounted cash flow method

E) Multiples based method

Calculate EVA

- Malone Corporation had net income of $192,000 in 2007. Its cost of capital was 12% and its invested capital was $1,000,000. Malone’s EVA for 2007 was

A) $119,000

B) $120,000

C) $72,000

D) $24,000

Calculate EVA

- Malone Corporation had net income of $192,000 in 2007. Its cost of capital was 12% and its invested capital was $1,000,000. Malone’s EVA for 2007 was

A) $192,000

B) $120,000

C) $72,000 [$192,000 – ($1,000,000 x .12)]

D) $24,000

Review

_______________ is a long-term project that involves a large sum of funds and that provides expected future benefits.

A) A balanced scorecard

B) A master budget

C) A capital budget

D) A capital investment

E) A multicriteria decision model

Review

_______________ is a long-term project that involves a large sum of funds and that provides expected future benefits.

A) A balanced scorecard

B) A master budget

C) A capital budget

D) A capital investment

E) A multicriteria decision model

Review

Which of the following is NOT a contribution that the accountant makes to the capital budgeting process?

A) Linkage to master budget (planning)

B) Linkage to the balanced scorecard (control)

C) Generation of relevant data for investment analysis purposes (decision making)

D) Conducting of post-audits (control)

E) All of the above are contributions made by the accountant.

Review

Which of the following is NOT a contribution that the accountant makes to the capital budgeting process?

A) Linkage to master budget (planning)

B) Linkage to the balanced scorecard (control)

C) Generation of relevant data for investment analysis purposes (decision making)

D) Conducting of post-audits (control)

E) All of the above are contributions made by the accountant.

Review

_______________ is a multicriteria decision technique that can combine qualitative and quantitative factors in the overall evaluation of decision alternatives.

A) The balanced scorecard

B) The analytic hierarchy process

C) A capital budget

D) The capital asset pricing model

E) None of the above.

Review

_______________ is a multicriteria decision technique that can combine qualitative and quantitative factors in the overall evaluation of decision alternatives.

A) The balanced scorecard

B) The analytic hierarchy process

C) A capital budget

D) The capital asset pricing model

E) None of the above.

Review

What is the proper procedure for handling working capital commitments in a capital budgeting decision?

A) Show it as a negative cash flow in the project initiation year.

B) Show it as a positive cash flow in the project initiation year.

C) Show it as a positive cash flow in the final project disposal year.

D) Both a and c are correct.

E) Both b and c are correct.

Review

What is the proper procedure for handling working capital commitments in a capital budgeting decision?

A) Show it as a negative cash flow in the project initiation year.

B) Show it as a positive cash flow in the project initiation year.

C) Show it as a positive cash flow in the final project disposal year.

D) Both a and c are correct.

E) Both b and c are correct.

Review

Cash flows occur at three stages of the capital investment project, in the following sequence:

A) project consideration, project implementation, project evaluation.

B) project implementation, project consideration, project termination.

C) project initiation, project operation, final disposal.

D) project operation, project evaluation, final disposal.

E) project reflection, project inception, project operation.

Review

Cash flows occur at three stages of the capital investment project, in the following sequence:

A) project consideration, project implementation, project evaluation.

B) project implementation, project consideration, project termination.

C) project initiation, project operation, final disposal.

D) project operation, project evaluation, final disposal.

E) project reflection, project inception, project operation.

Review

USE THE FOLLOWING INFORMATION TO ANSWER the NEXT 3 QUESTIONS

Brent Corporation is considering purchasing a machine for $2,000,000. The machine will generate a net after-tax income of $80,000 per year. The firm will use straight-line depreciation for the new machine over the machine's useful life of 10 years with no residual value.

What is the new machine's net present value if the firm has a minimum rate of return of 10% on all investments?

A) $140,000

B) $279,400

C) $1,139,700

D) $1,200,000

E) $1,508,400

Review

USE THE FOLLOWING INFORMATION TO ANSWER the NEXT 3 QUESTIONS

Brent Corporation is considering purchasing a machine for $2,000,000. The machine will generate a net after-tax income of $80,000 per year. The firm will use straight-line depreciation for the new machine over the machine's useful life of 10 years with no residual value.

What is the new machine's net present value if the firm has a minimum rate of return of 10% on all investments?

A) $140,000

B) $279,400

C) $1,139,700

D) $1,200,000

E) $1,508,400

Initial investment ($2,000,000) x 1.000 = ($2,000,000)

Cash flow = $80,000 + ($2,000,000 / 10) = $280,000

Present value factor 1-10 = 6.1425

$280,000 x 6.145= $1,720,600

NPV=($279,400) reject

Review

What is the payback period for the new machine?

A) 7.14 years

B) 8.33 years

C) 9.16 years

D) 10 years

E) 14.29 years

Review

What is the payback period for the new machine?

A) 7.14 years

B) 8.33 years

C) 9.16 years

D) 10 years

E) 14.29 years

Payback period = $2,000,000 / $280,000 = 7.14 years

Review

What is the new machine's average book (accounting) rate of return?

A) 6.35%

B) 7.50%

C) 8%

D) 10%

E) 12%

Review

What is the new machine's average book (accounting) rate of return?

A) 6.35%

B) 7.50%

C) 8%

D) 10%

E) 12%

Calculation – Avg. investment = $2,000,000/2 =$1,000,000

$80,000/$1,000,000 = 8%

Review

_______________ is the process of selectively varying a key input variable.

A) Sensitivity analysis

B) Scenario analysis

C) Monte Carlo simulation

D) The balanced scorecard

Review

_______________ is the process of selectively varying a key input variable.

A) Sensitivity analysis

B) Scenario analysis

C) Monte Carlo simulation

D) The balanced scorecard

Review

The capital budgeting method(s) that provide(s) consistency between data for budgeting and data for performance evaluation is (are) the:

A) payback period.

B) discounted cash flow methods.

C) accounting rate of return

D) All of the above are correct.

E) Only a and b are correct.

Review

The capital budgeting method(s) that provide(s) consistency between data for budgeting and data for performance evaluation is (are) the:

A) payback period.

B) discounted cash flow methods.

C) accounting rate of return

D) All of the above are correct.

E) Only a and b are correct.

Review

Which of the following capital budgeting methods ignores the time value of money?

A) Internal rate of return

B) Present value payback period

C) Net present value

D) Accounting rate of return

Review

Which of the following capital budgeting methods ignores the time value of money?

A) Internal rate of return

B) Present value payback period

C) Net present value

D) Accounting rate of return

Review

_______________ is a measure of financial performance designed to approximate an entity's economic profit.

A) IRR

B) Payback period

C) NPV

D) Accounting rate of return

E) EVA

Review

_______________ is a measure of financial performance designed to approximate an entity's economic profit.

A) IRR

B) Payback period

C) NPV

D) Accounting rate of return

E) EVA

18-28

Mortgage LoansConsumer Loans

Total Assets $ 2,000 $20,000

Operating Income 400 2,500

Return on Investment 20% 12.5%

18-28

Mortgage LoansConsumer Loans

Residual Income:

(a)* at 10% $200 $ 500

(b)** at 15% 100 (500)

(c)*** at 20% 0 (1,500)

* $400 - ($2,000 x .10) = $200 $2,500 - ($20,000 x .10) = $ 500

** $400 - ($2,000 x .15) = $100 $2,500 - ($20,000 x .15) = $ (500)

*** $400 - ($2,000 x .20) = $0 $2,500 - ($20,000 x .20) = $(1,500)

19-28

Book value of equity = $1,325,000

Market value of equity = $2.55 x 1,800,000 =$4,590,000

Discounted free cash flow = $260,000 x 1/.06 = $433,333

Multiples based valuations

Earnings = 9 x $300,000 = $2,700,000

Free cash flow = 18 x $260,000 = $4,680,000

Sales = 2 x $3,500,000 = $7,000,000

P20-38

Payback Period:

The payback period = $500,000 $120,000/year

= 4.17 years(about 4 years and 2 months)

Book (accounting) rate of return:

Accounting income = cash income- depreciation

= $120,000 – ($500,000/10)

As a result, the average increase in net Income= $70,000/year. Thus, the ARR

(1) On initial investment: $70,000/$500,000 = 14.00%

(2) On average investment:

Average investment: ($500,000 + 0)/2 = $250,000

Book rate of return: $70,000 $250,000 = 28.00%

NPV: using the PV factors from Table 2 (p. 871),

($120,000 x 5.65) – 500,000

NPV = $178,000

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