PERM Flashcards
A company has two divisions. Division A has operating income of $500 and total assets of $1,000. Division B has operating income of $400 and total assets of $1,600. The required rate of return for the company is 10%. Division B’s residual income would be which of the following amounts?
$240
Zig Corp. provides the following information:
Pretax operating profit $300,000,000
Tax rate 40%
Capital used to generate profits
50% debt, 50% equity $1,200,000,000
Cost of equity 15%
Cost of debt 5%
What of the following represent Zip’s year-end economic value-added amount?
a. $1,800,000,000
b. $0
c. $60,000,000
d. $120,000,000
$60,000,000
Green, Inc., financial investment-consulting firm, was engaged by Maple Corp. to provide technical support for making investment decisions. Maple, manufacturer of ceramic tiles, was in the process of buying Bay, Inc., its prime competitor. Green’s financial analyst made an independent detailed analysis of Bay’s average collection period to determine which of the following?
a. Operating profitability.
b. Return on equity.
c. Financing.
d. Liquidity.
Liquidity.
The following is financial data for Laylow Corp. for the last two years.
Balance Sheet 20X1 20X2
Cash $10,000 $20,000
Accounts receivable 40,000 50,000
Inventory 30,000 40,000
Property, plant, and equipment 200,000 250,000
Total assets 280,000 360,000
Current liabilities 50,000 60,000
Long-term debt 150,000 190,000
Stockholders’ equity 80,000 110,000
Total liabilities and stockholders’
equity 280,000 360,000
Income Statement 20X2
Sales $500,000
Cost of goods sold (400,000)
General and administrative
expenses (50,000)
Interest expense (10,000)
Income taxes (10,000)
Net income 30,000
Other information
Depreciation expense $25,000
Number of shares of stock
outstanding 100,000
For 20X2 calculate the average collection period for accounts receivable for Laylow using a 360-day year.
32.4 days
Wexford Co. has a subunit that the following data for year I:
Asset (investment) turnover 1.5 times
Sales $750,000
Return on sales 8%
The imputed interest rate is 12%. What is the division residual income for year I?
$0
A strategy initiative in the balanced scorecard framework is
A key action pagram required to achieve strategic objectives.
Which of the following is not a limitation on the use of ROI as performance measure?
a. It could be affected arbitrarily by allocation of indirect costs.
b. It could cause managers to postpone critical expenditures.
c. It is unrelated to shareholder value.
d. It could cause managers to not accept projects that would be advantageous to the firm.
It is unrelated to shareholder value.
Which of the following terms represents the residual income that remains after the cost of all capital, including equity capital, has been deducted?
a. Economic value-added.
b. Net operating capital.
c. Market value-added.
d. Free cash flow.
Economic value-added.
A company reports the following account balances at year-end:
Account Balance
Long-term debt $200,000
Cash 50,000
Net sales 600,000
Fixed assets (net) 320,000
Tax expense 67,500
Inventory 25,000
Common Stock 100,000
Interest expense 20,000
Administrative expense 35,000
Retained earnings 150,000
Accounts payable 65,000
Accounts receivable 120,000
Cost of goods sold 400,000
Depreciation expense 10,000
Additional information :
The opening balance of common stock was $100,000
The opening balance of retained earnings was $32,500
The company had 10,000 common shares outstanding all year
No dividends were paid during the year
For the year just ended, the company has a profit margin of
11.25%
The following selected data is for the Consumer Products Division of Gerriod Corp.
Sales $50,000,000
Average invested capital (total assets) 20,000,000
Net operating profit 3,000,000
Cost of capital 8%
Calculate the asset turnover ratio for the Consumer Products Division.
2.5
The following information is available for Questmore Industries:
Net operating income after
taxes (NOPAT) $100,000,000
Depreciation expense 65,000,000
Change in net working capital 15,000,000
Capital expenditures 30,000,000
Invested capital (total assets -
current liabilities) $400,000,000
Weighted-average cost of capital 12%
Calculate the economic value added (EVA) for Questmore.
$52,000,000
To measure inventory management performance, a company monitors its inventory turnover ratio. Listed below are selected data from the company’s accounting records :
Current year Prior year
Annual sales $2,525,000 $2,125,000
Gross profit percent 40% 35%
Beginning finished goods inventory for the current year was 15% of the prior year’s annual sales, and ending finished goods inventory was 22% of the current year’s annual sales. What was the company’s inventory turnover at the end of the current period?
3.47
Which of the following would illustrate vertical financial statement analysis?
a. Interest expense as percentage of net sales.
b. Net sales over time.
c. Gross profit compared to industry averages.
d. Earnings per share as compared to the prior year.
Interest expense as percentage of net sales.
A company has two divisions. Division A has operating income of $500 and total assets of $1,000. Division B has operating income of $400 and total assets of $1,600. The required rate of return for the company is 10%. The company’s residual income would be which of the following amounts?
a. $900
b. $0
c. $260
d. $640
$640
The management of company would do which of the following to compare and contrast its financial information to published information reflecting optimal amounts?
a. Utilize best practices.
b. Forecast.
c. Budget.
d. Benchmark.
Benchmark.
What is the primary disadvantage of using return on investment (ROI) rather than residual income (RI) to evaluate the performance of investment center managers?
ROI may lead to rejecting projects that yield positive cash flows.
The following selected data is for the Consumer Products Division of Gerriod Corp.
Sales $50,000,000
Average invested capital (total assets) 20,000,000
Net operating profit 3,000,000
Cost of capital 8%
Calculate the residual income for the Consumer Products Division.
$1,400,000
Which of the statements best describes the concept of six-sigma quality?
a. 10 defects per million.
b. 6.0 defects per million.
c. 100 defects per million.
d. 3.4 defects per million.
3.4 defects per million.
Under the balanced scorecard concept developed by Kaplan and Norton, employee satisfaction and retention are measures used under which of the following perspectives?
a. Financial.
b. Internal business.
c. Customer
d. Learning and growth.
Learning and growth.
Which of the following steps in the strategic planning process should be completed first?
a. Determine actions to achieve goals.
b. Create a mission statement.
c. Translate objectives into goals.
d. Develop performance measures.
Create a mission statement.
A strategy map in the balanced scorecard framework is
Diagrams of the cause-and-effect relationships between strategic objectives.
The following selected data is for the Consumer Products Division of Gerriod Corp.
Sales $50,000,000
Average invested capital (total assets) 20,000,000
Net operating profit 3,000,000
Cost of capital 8%
Calculate the return on sales for the Consumer Products Division
6%
The CFO of a company is concerned about the company’s accounts receivable turnover ratio. The company currently offers customers terms of 3/10, net 30. Which of the following strategies would most likely improve the company’s accounts receivable turnover ratio?
a. Entering into factoring agreement with finance company.
b. Changing customer terms to 1/10, net 30.
c. Pledging the accounts receivable to finance company.
d. Changing customer terms to 3/20, net 30.
Entering into factoring agreement with finance company.
Which of the following is not profitability ratio?
a. Return on assets.
b. Price/earnings ratio.
c. Gross margin.
d. Operating profit margin.
Price/earnings ratio.
A company reports the following account balances at year-end:
Account Balance
Long-term debt $200,000
Cash 50,000
Net sales 600,000
Fixed assets (net) 320,000
Tax expense 67,500
Inventory 25,000
Common Stock 100,000
Interest expense 20,000
Administrative expense 35,000
Retained earnings 150,000
Accounts payable 65,000
Accounts receivable 120,000
Cost of goods sold 400,000
Depreciation expense 10,000
Additional information :
The opening balance of common stock was $100,000
The opening balance of retained earnings was $32,500
The company had 10,000 common shares outstanding all year
No dividends were paid during the year
For the year just ended, the company has a gross margin of
33.3%
Which of the following is not profitability ratio?
a. Return on assets.
b. Price/earnings ratio.
c. Gross margin.
d. Operating profit margin.
Price/earnings ratio.
The following information is available for Armstrong
Net operating income after taxes $36,000,000
Depreciation expense 15,000,000
Change in net working capital (increase) 10,000,000
Capital expenditures 12,000,000
Invested capital (net assets) 100,000,000
Weighted-average cost of capital 10%
What is the free cash flow for 2012?
29,000,000
