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Capital budgetin > Performance Measures > Flashcards

Performance Measures Flashcards

1
Q

What four perspectives are included in Balanced Scorecard?

A

Financial - ROI- Revenue Growth- Profitability

Customer - Increase Customers- Increase Satisfaction

Internal Business Processes - Efficient and Effective Operations- Improve Quality- Reduce Defects

Learning & Growth - Training- Personnel Development

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2
Q

Why was Balanced Scorecard created?

A

To measure Performance.

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3
Q

What are Strategy Maps?

A

Diagrams of Strategic Cause and Effect Relationships.

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4
Q

What is a Strategic Initiative?

A

A plan to achieve goals.

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5
Q

What measures are used under Value-Based Management?

A 
Return on Investment
Residual Income
Spread
Economic Value Added
Free Cash Flow
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6
Q

How is Return on Investment (ROI) calculated?

A

ROI = Return / Investment

Example: You Invest $100 to buy a machine that generates $60 in Operating Income

$60 / $100 = 60% ROI

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7
Q

How is Residual Income calculated?

A

Operating Income - (Required Rate of Return x Invested Capital) = Residual Income

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8
Q

What is another name for Required Rate of Return (RROR)?

A

RROR is also called ‘Cost of Capital’

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9
Q

What is Weighted Average Cost of Capital (WACC)? How is it calculated?

A

Cost of Capital is the weighted average of the interest rates you pay for your Capital.

Includes Debt and the Rate of Return your Equity Shareholders expect

Example: 45% of your Capital is supported by debt and has an interest rate of 9%. 55% of your Capital is supported by equity and shareholders expect a ROR of 12%

Your Cost of Capital is: (.45 x .09) + (.55 x .12) = 10.65%

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10
Q

How is Spread calculated?

A

Spread = ROI - Cost of Capital

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11
Q

What is the primary point of Economic Value Added? How is it calculated?

A

Investments should exceed costs- with an emphasis on stockholder value.

Economic Value Added = Operating Income After Tax - (Net Assets x WACC)

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12
Q

How is Free Cash Flow calculated?

A 
Operating Income After Tax
\+ Depreciation & Amortization
- Capital Expenditures
- Change in Net Working Capital
= Free Cash Flow
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13
Q

What is measured by Six Sigma?

A

It measures a product versus its quality goal.

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14
Q

What is the Asset Turnover Ratio?

A

Sales / Average Assets

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15
Q

What does the Current Ratio tell us? How is it calculated?

A

Can the company pay their short-term liabilities?

Current Ratio = Current Assets / Current Liabilities

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16
Q

What does the Debt to Equity Ratio tell us? How is it calculated?

A

How is the company financing its capital?

Debt to Equity Ratio = Total Debt / Total Equity

17
Q

What does the Debt to Total Assets ratio tell us? How is it calculated?

A

What proportions of the company’s assets are encumbered with debt?

Debt to Total Assets = Total Liabilities / Total Assets

18
Q

What does Gross Margin % tell us? How is it calculated?

A

How profitable is the product after COGS?

Gross Margin = Gross Profit / Net Sales

19
Q

What does Operating Profit Margin tell us? How is it calculated?

A

How profitable is the product after all expenses (except interest and taxes)?

Operating Profit Margin = Operating Profit / Net Sales

20
Q

How is Times Interest Earned calculated and what does it mean?

A

Can the company make their interest payments?

Times Interest Earned = Earnings Before Tax & Interest / Interest Expense

21
Q

What does Return on Assets tell us? How is it calculated?

A

What % return are the assets generating?

Return on Assets = Net Income (net of interest & taxes) / Average Total Assets

22
Q

How is Market/Book ratio calculated?

A

Market Value of Common Stock / Book Value of Common Stock

23
Q

What is Inventory Turnover and how is it calculated?

A

How quickly does inventory get sold?

Inventory Turnover = COGS / Average Inventory

24
Q

What is the Quick Ratio and how is it calculated?

A

It measures short-term liquidity- and only includes assets that are quickly available (i.e. not inventory)

Quick Ratio = (Current Assets - Inventory) / Current Liabilities

25
Q

What is Average Collection Period- and how is it calculated?

A

How many days does it take the company to collect payment on A/R?

Average Collection Period = Average AR / Average Sales Per Day

26
Q

What is an Internal Failure?

A

Products have quality defects- but are caught BEFORE they leave the warehouse.

27
Q

What is an External Failure?

A

Product reaches the customer- but they are not satisfied with the quality of the product.

This includes recalls.

28
Q

What is Appraisal Cost?

A

Quality control- testing & inspection costs.

Capital budgetin (28 decks)

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