Lecture 4

Question 1

3 advantages of a divisional organisation structure

Answer 1

Improved Decision Quality. Faster Decision making. Localised Expertise.

Question 2

3 disadvantages of a divisional organisation structure

Answer 2

Inter-divisional competition. Misaligned goals. Conflict of interest

Question 3

What is the equation for Return on Investment (ROI)?

Answer 3

ROI = ((Divisionable controllable profit before interest and tax) / (Divisional capital employed)) *100

Question 4

What should be used if controllable profit can’t be calculated?

Answer 4

Profit before income and tax for the division

Question 5

3 advantages of ROI

Answer 5

Many managers understand and value it. Useful for comparing different businesses. Commonly used

Question 6

2 disadvantages of ROI

Answer 6

Actions to increase divisional ROI may harm the company. May not encourage goal congruence.

Question 7

3 ROI Behavioural issues when it comes to creative accounting

Answer 7

Short-term Focus on Profits. Asset Reduction. Avoiding Necessary Investments

Question 8

What is the equation of Residual Income (RI)?

Answer 8

RI = Division controllable profit before interest and tax - (capital employed * company cost of capital)

Question 9

What should be used if controllable profit can’t be calculated?

Answer 9

Profit before interest and tax for the division

Question 10

3 advantages of RI?

Answer 10

Clear Profit Indicator. Long-term Focus. Promotes Capital Efficiency

Question 11

3 disadvantages of RI?

Answer 11

Complex calculation. Potential misunderstanding. Potential for Manipulation

Question 12

3 RI Behavioural issues when it comes to creative accounting

Answer 12

Delaying Maintenance. Changing Inventory Valuation Methods. Earnings management

Question 13

EVA = ?

Answer 13

Divisional profit plus/minus accounting adjustments minus cost of capital charge on assets

Question 14

What are the EVA adjustments?

Answer 14

Operating profit
Less: Tax
Less: tax benefit of interest
Add: R&D costs unused
Add: Advertising costs unused
Less: capital charge

Question 15

What is the equation for capital charge?

Answer 15

Capital charge = Cost of capital * Capital employed

Question 16

3 EVA advantages

Answer 16

Focus on Shareholder Value. Long-term Perspective. Elimination of Accounting Distortions

Question 17

3 EVA disadvantages

Answer 17

Complex. Adjustment Inconsistencies between different companies. Costly to implement

Question 18

3 EVA behavioural issues when it comes to creative accounting

Answer 18

Manipulation of Capital Charge. Cutting R&D Expenditure. Managers could focus on short term to inflate figures.