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ACC 400 Week 5 Individual Assignment Textbook Problems

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ACC 400 Week 5 Individual Assignment Textbook Problems Week Five Textbook Exercise Exercise 25.4: ROI versus EVA Measures Sapsora Company uses ROI to measure the performance of its operating divisions and to reward division managers. A summary of the annual reports from two divisions is shown below. The company’s weighted-average cost of capital is 12 percent. Division A Division B Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,000,000 $8,750,000 Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500,000 1,750,000 After-tax operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000,000 1,180,000 ROI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25% 14% Which division is more profitable? Would EVA more clearly show the relative contribution of the two divisions to the company as a whole? Show the computations. Suppose the manager of Division A was offered a one-year project that would increase his investment base by $250,000 and show a profit of $37,500. Would the manager choose to invest in the new project? Exercise 25.5: Performance and ROI versus Residual Income An investment center in Shellforth Corporation was asked to identify three proposals for its capital Capital Budget Proposals A B C Capital required . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $80,000 $50,000 $150,000 Annual operating return . . . . . . . . . . . . . . . . . . . . . . . . . . 24,000 16,000 15,000 Shellforth uses residual income to evaluate all capital budgeting projects. Its minimum required return is 12 percent. Assume you are the investment center manager. Which project do you prefer? Why? Assume your investment center’s current ROI is 18 percent and that the president of Shellforth is thinking about using ROI for the investment center’s evaluation. Would your preferences for the projects listed above change? Why? Exercise 25.6: Concerns about ROI Jennifer Baskiter is president and CEO of Plants& More.com , an Internet company that sells plants and flowers. The success of her startup Internet company has motivated her to expand and create two divisions. One division focuses on sales to the general public and the other focuses on business-to-business sales to hotels, restaurants, and other firms that want plants and flowers for their businesses. She is considering using return on investment as a means of evaluating her divisions and their managers. She has hired you as a compensation consultant. What issues or concerns would you raise regarding the use of ROI for evaluating the divisions and their managers? Exercise 25.7: Compensation Choices You are the manager of the Midwest Region, a 27-restaurant division that is part of the chain “Bites and Bits.” The restaurants offer casual dining and compete with such chains in your region as Olive Garden and Outback Steakhouse . You receive an annual cash bonus of 5 percent of sales when residual income in your region exceeds the required minimum return on invested capital of 15 percent. You are using a similar performance evaluation plan to reward each of the managers in your 27 restaurants. You are concerned that important performance variables are being overlooked. For example, you have heard complaints from other regions and in your own region that the quality of the food is bad, it is difficult to retain serving staff in the restaurants, and finding a good chef is very difficult. At an upcoming planning meeting for all regional directors, the agenda includes considering the business performance evaluation and compensation plan. What could you say about the current compensation plan and what would you propose to remedy the problems? Exercise 26.8: Analyzin

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