22) Investment centers need KPIs to evaluate how efficiently the business unit uses assets. Typical KPIs of this type
would include all of the following EXCEPT:
A) ROI (Return on investment).
B) EVA (Economic value added).
C) NOI (Net operating income).
D) RI (Residual Income).
23) Which of the following KPIs are used to evaluate how efficiently a business unit uses assets?
A) Sales revenue growth
B) Percentage of market share
C) Residual income
D) Production efficiency
24) Which of the following KPIs are used to evaluate how efficiently a business unit uses assets?
A) Return on investment
B) Defect rate
C) Employee satisfaction
D) Production efficiency
25) Which of the following KPIs are used to evaluate how efficiently a business unit uses assets?
A) Hours of employee training
B) Defect rate
C) New product development time
D) Economic value added
26) The formula for ROI (return on investment) is:
A) operating income divided by average total assets.
B) operating income minus minimum acceptable operating income.
C) after-tax operating income minus the weighted average cost of capital times average total assets excluding
current liabilities.
D) operating income divided by sales revenue.
27) The formula for EVA (economic value added) is:
A) operating income divided by average total assets.
B) operating income minus minimum acceptable operating income.
C) after-tax operating income minus the weighted average cost of capital times average total assets excluding
current liabilities.
D) operating income divided by sales revenue.
28) The formula for RI (residual income) is:
A) operating income divided by average total assets.
B) operating income minus minimum acceptable operating income.
C) after-tax operating income minus the weighted average cost of capital times average total assets excluding
current liabilities.
D) operating income divided by sales revenue.
29) Parkinson Company provides the following financial data:
Income from operations
$200,000
Interest expense
$45,000
Gains/(losses) on sale of equipment
($2,500)
Net income
$152,500
Total assets at Jan 1
$2,600,000
Total assets at Dec 31
$3,200,000
How much is the return on investment?
A) 6.3%
B) 5.3%
C) 6.9%
D) 7.2%
30) Bardot Company reported operating income of $16,400. Assets at the beginning of the year totaled $440,000.
Assets at the end of the year totaled $450,000. How much is the ROI?
A) 4.2%
B) 3.9%
C) 2.7%
D) 3.7%
31) Recreation Equipment Company has several divisions which are investment centers. Data for the Boat Division
and the Trailer Division are shown here:
Boat Division
Trailer Division
Operating income
$90,000
$36,000
Total assets at Jan 1
$670,000
$230,000
Total assets at Dec 31
$710,000
$220,000
Which of the following statements would be the MOST meaningful interpretation of this data?
A) The performance of the Boat Division is better than the Trailer Division because the Boat Division has higher
assets.
B) The Trailer Division shows a more efficient use of assets than the Boat Division because it has a higher ROI.
C) The Boat Division shows a more efficient use of assets than the Trailer Division because it has a higher operating
income.
D) The Boat Division was more successful financially than the Trailer Division because it shows an increase in
assets as contrasted to a reduction of assets in the Trailer Division.
Beginning assets + ending assets
Divide by 2
Average assets
Operating income
ROI (op inc/avg assets)
32) Recreation Equipment Company has several divisions which are investment centers. Data for the Boat Division
and the Trailer Division are shown here:
Boat Division
Trailer Division
Operating income
$90,000
$36,000
Total assets at Jan 1
$670,000
$230,000
Total assets at Dec 31
$710,000
$220,000
How much is the ROI of the Boat Division?
A) 12.7%
B) 12.8%
C) 12.9%
D) 13.0%
Beginning assets + ending assets
Divide by 2
Average assets
Operating income
ROI (op inc/avg assets)
33) If a large diversified company has many different divisions, each competing for capital expenditure funds, which
of the following statements would be MOST relevant?
A) The division with the lowest assets should have priority for investment funds to allow that division to grow to the
scale of the other divisions.
B) The division with the highest operating income should take priority, because it will likely continue to earn the
highest operating income for the company.
C) The division with the highest ROI should take priority because it shows that it can produce the highest return per
invested dollar.
D) The division with the highest growth rate in assets should be given additional funding.
34) All of the following statements reflect ways in which ROI is used as an evaluation tool EXCEPT:
A) the ROI of a company division is compared with that of other companies to see how it compares to the
competition.
B) a company compares the ROI of various divisions to determine which one will get additional investment.
C) the ROI is used to determine the optimum financing mix of debt versus equity.
D) the ROI is used across time to determine whether a division‘s performance is improving or not.
35) Which of the following statements MOST accurately describes the profit margin?
A) How efficiently a division uses its average assets to generate sales
B) How much operating income the division earns on every dollar of sales
C) How much return a division generates on average assets
D) How much extra income does a division generate above the minimum acceptable level
36) Which of the following statements MOST accurately describes asset turnover?
A) How efficiently a division uses its average assets to generate sales
B) How much operating income the division earns on every dollar of sales
C) How much return a division generates on average assets
D) How much extra income does a division generate above the minimum acceptable level
37) Which of the following statements MOST accurately describes residual income?
A) How efficiently a division uses its average assets to generate sales
B) How much operating income the division earns on every dollar of sales
C) How much return a division generates on average assets
D) How much extra income does a division generate above the minimum acceptable level
38) Huntswell Corporation has two major divisions-Agricultural Products and Industrial Products. Data for the year
just finished is as follows:
Agriculture Division
Industrial Division
Sales revenue
$140,000
$1,040,000
Operating income
$16,400
$220,000
Average assets
$300,000
$5,540,000
Target rate of return
4.0%
4.0%
For the Industrial Division, how much was the ROI?
A) 5.5%
B) 4.5%
C) 4.0%
D) 3.9%
Operating income
Average asset
ROI
39) Huntswell Corporation has two major divisions: Agricultural Products and Industrial Products. Data for the year
just finished is as follows:
Agriculture Division
Industrial Division
Sales revenue
$140,000
$1,040,000
Operating income
$16,400
$220,000
Average assets
$300,000
$5,540,000
Target rate of return
4.0%
4.0%
For the Agricultural Division, how much is the profit margin?
A) 10.5%
B) 11.1%
C) 11.4%
D) 11.7%
Operating income
Sales revenue
Profit margin
40) Huntswell Corporation has two major divisions-Agricultural Products and Industrial Products. Data for the year
just finished is as follows:
Agriculture Division
Industrial Division
Sales revenue
$140,000
$1,040,000
Operating income
$16,400
$220,000
Average assets
$300,000
$5,540,000
Target rate of return
4.0%
4.0%
For the Industrial Division, how much is the profit margin?
A) 21.2%
B) 19.3%
C) 17.4%
D) 16.7%
Operating income
Sales revenue
Profit margin
41) Huntswell Corporation has two major divisions Agricultural Products and Industrial Products. Data for the
year just finished is as follows:
Agriculture Division
Industrial Division
Sales revenue
$140,000
$1,040,000
Operating income
$16,400
$220,000
Average assets
$300,000
$5,540,000
Target rate of return
4.0%
4.0%
For the Agricultural Division, how much is the asset turnover?
A) 41.1%
B) 46.7%
C) 49.9%
D) 51.2%
Sales revenue
$140,000
Average assets
$300,000
Asset turnover
46.7%
42) Huntswell Corporation has two major divisions Agricultural Products and Industrial Products. Data for the
year just finished is as follows:
Agriculture Division
Industrial Division
Sales revenue
$140,000
$1,040,000
Operating income
$16,400
$220,000
Average assets
$300,000
$5,540,000
Target rate of return
4.0%
4.0%
For the Industrial Division, how much is the asset turnover?
A) 11.1%
B) 16.7%
C) 18.8%
D) 21.2%
assets
43) If upper management is NOT satisfied with a division’s current profit margin, which of the following strategies
would they most likely recommend?
A) Reduce the level of assets owned by the division
B) Reduce either product costs or operating expenses or both
C) Invest in more assets for the division
D) Locate new equity investment funds
44) If upper management is NOT satisfied with a division’s asset turnover ratio, which of the following strategies
would they most likely recommend?
A) Reduce the level of assets owned by the division
B) Reduce either product costs or operating expenses or both
C) Invest in more assets for the division
D) Locate new equity investment funds
45) Huntswell Corporation has two major divisions Agricultural Products and Industrial Products. Data for the
year just finished is as follows:
Agriculture Division
Industrial Division
Sales revenue
$140,000
$1,040,000
Operating income
$16,400
$220,000
Average assets
$300,000
$5,540,000
Target rate of return
4.0%
4.
For the Agricultural Division, how much is the residual income?
A) $4,400
B) $2,650
C) $1,200
D) ($3,200)
Average assets
Operating income
46) Huntswell Corporation has two major divisions: Agricultural Products and Industrial Products. Data for the year
just finished is as follows:
Agriculture Division
Industrial Division
Sales revenue
$140,000
$1,040,000
Operating income
$16,400
$220,000
Average assets
$300,000
$5,540,000
Target rate of return
4.0%
4.0%
For the Industrial Division, how much is the residual income?
A) $2,400
B) $1,650
C) ($200)
D) ($1,600)
Agriculture Division
Industrial Division
Average assets
47) Which of the following statements MOST accurately explains a positive residual income?
A) A division has produced more operating income than the target set by upper management.
B) A division has generated positive operating income.
C) A division has been liquidated, and there is some residual amount of income earned after the liquidation.
D) A division has recorded a profit on sales of plant equipment which was sold for higher than its residual value.
48) The EVA is a way of looking at a division’s performance from the point of view of the:
A) managers.
B) employees.
C) shareholders and creditors.
D) suppliers.
49) Which of the following statements MOST accurately describes a company’s weighted average cost of capital?
A) The interest rate charged to the company for long-term debt
B) The amount a company incurs for capital expenditures
C) The minimum rate of return required by its investors
D) The average of beginning assets and ending assets
50) Which of the following statements is TRUE about the weighted average cost of capital (WACC)?
A) If a business has a high risk level, the WACC will be higher.
B) If a business has a high risk level, the WACC will be lower.
C) The WACC represents the corporation’s internal return targets.
D) The WACC is the same as a business’s ROI.
51) Marcia Consumer Products has several divisions, including the Education Division and the Recreation Division.
Data on the two divisions are shown here:
Education Division
Recreation Division
Current ROI
9.2%
10.0%
Current WACC
8.0%
8.0%
Operating income
$110,000
$200,000
Effective tax rate
20.0%
20.0%
Average total assets
$1,200,000
$2,000,000
Current liabilities
$30,000
$30,000
How much is the EVA for the Education Division?
A) $12,890
B) $4,600
C) ($5,600)
D) ($12,750)
Operating income
Effective tax rate
Income tax expense
Operating income after tax
Average total assets
Current liabilities
Total assets less liabilities
WACC
EVA
52) Marcia Consumer Products has several divisions, including the Education Division and the Recreation Division.
Data on the two divisions are shown here:
Education Division
Recreation Division
Current ROI
9.2%
10.0%
Current WACC
8.0%
8.0%
Operating income
$110,000
$200,000
Effective tax rate
20.0%
20.0%
Average total assets
$1,200,000
$2,000,000
Current liabilities
$30,000
$30,000
How much is the EVA for the Recreation Division?
A) $1,890
B) $2,400
C) ($1,300)
D) ($2,950)
Operating income
Effective tax rate
Income tax expense
Operating income after tax
Average total assets
Current liabilities
Total assets less liabilities
WACC
WACC
EVA
53) For the calculation of EVA, current liabilities are deducted from total average assets for what reason?
A) Because liabilities are not included in assets, and so they should be deducted.
B) Because the current liabilities are due within a one year period.
C) Because it is necessary in order to calculate the equity of the company.
D) Because the funds needed to pay the current liabilities will not be available to generate income in the long run.
54) One of the key drawbacks of using financial KPIs like ROI and EVA is that:
A) they are difficult and complex to calculate.
B) they change from period to period.
C) they cannot be readily compared to other companies.
D) they focus only on the short term.
55) A key benefit of using the balanced scorecard to evaluate business performance is that:
A) it is simple to implement.
B) individual performance measures each have their limitations; the balanced scorecard gives a broader picture of
performance.
C) it is limited to financial measures, and so it keeps the focus on the “bottom line”.
D) it is a standardized measure, and so it can be readily used to compare companies in different industries on a
consistent basis.
56) Assume Division 1 of the XYZ Company had the following results last year.
Sales
$5,000,000
Operating income
1,000,000
Total assets (average)
10,000,000
Current liabilities
500,000
Management’s required rate of return is 8% and the weighted average cost of capital is 6%. Its effective tax rate is
30%.What is the division’s return on investment?
A) 5%
B) 10%
C) 20%
D) 50%
57) Assume Division 1 of the XYZ Company had the following results last year.
Sales
$5,000,000
Operating income
1,000,000
Total assets (average)
10,000,000
Current liabilities
500,000
Management’s required rate of return is 8% and the weighted average cost of capital is 6%. Its effective tax rate is
30%. What is the division’s economic value added?
A) $60,000
B) $130,000
C) $270,000
D) $430,000
Operating income
Effective tax rate
Income tax expense
Operating income after tax
Average total assets
Current liabilities
Total assets less liabilities
WACC
EVA
58) Assume the Apple division of the Gala Company had the following results last year.
Sales
$3,000,000
Operating income
500,000
Total assets (average)
4,500,000
Current liabilities
300,000
Management’s required rate of return is 10% and the weighted average cost of capital is 8%. Its effective tax rate is
30%. What is Apple division’s return on investment?
A) 11.11%
B) 16.67%
C) 66.67%
D) 60.00%
59) Assume the Apple division of the Gala Company had the following results last year.
Sales
$3,000,000
Operating income
500,000
Total assets (average)
4,500,000
Current liabilities
300,000
Management’s required rate of return is 10% and the weighted average cost of capital is 8%. Its effective tax rate is
30%. What is Apple division’s EVA?
A) $14,000
B) $14,760
C) $15,535
D) $16,220
Operating income
Effective tax rate
Income tax expense
Operating income after tax
Average total assets
Current liabilities
Total assets less liabilities
WACC
EVA
60) Which of the following goals of a performance evaluation system is accomplished when the company’s actual
results are compared to industry standards?
A) Motivation of unit managers
B) Promotion of goal congruence
C) External benchmarking
D) Communicating expectations
61) Huntswell Corporation has two major divisions-Agricultural Products and Industrial Products. Data for the year
just finished is as follows:
Agriculture Division
Industrial Division
Sales revenue
$140,000
$1,040,000
Operating income
$16,400
$220,000
Average assets
$300,000
$5,540,000
Target rate of return
4.0%
4.0%
For the Agricultural Division, how much was the ROI?
A) 5.5%
B) 4.5%
C) 3.2%
D) 5.9%
Operating income
Average asset
ROI