Topic 7 - Linking Performance to Markets

Question 1

an internally set price that accounts for the transfer of goods from one division to another within the same firm.

Answer 1

Transfer price

Question 2

The transfer of goods and services between divisions are recorded at external market prices.

Answer 2

Market pricing

Question 3

Used when market prices are not available. Pricing based on cost can be done at
- Variable cost (lowest transfer price)
- Full cost (variables and overhead costs)
- Full cost plus a markup
- Approximate an arm’s length market price

Answer 3

Cost based pricing

Question 4

Managers can choose to negotiate the prices among themselves to reach a transfer price.

Answer 4

Negotiated prices

Question 5

Giving both upstream and downstream divisions a price that makes everyone happy. Selling division uses market price as its transfer price and purchasing division uses full cost as its transfer price.

Answer 5

Dual pricing

Question 6

3 Key stakeholders in measuring Corporate Performance

Answer 6

• Customers
• Suppliers
• Owners and creditors

Question 7

the mix of product and service attributes that a firm offers to customers in terms of price, product, features, quality, availability, etc.

Answer 7

Value proposition

Question 8

3 Financial Customer-value measures

Answer 8

• Revenue or revenue growth
• Gross profit margin
• Warranty expenses and/or product returns

Question 9

3 NON-Financial Customer-value measures

Answer 9

• Market share or market growth
• Customer satisfaction
• Referrals

Question 10

Two Performance measures in the factor market

Answer 10

• Reliability of payment (cash flow)
• Promptness of payment (days outstanding accounts payable)

Question 11

three Financial Performance measures in the financial market

Answer 11

• Profit
• ROI
• Residual income

Question 12

Formula for residual income

Answer 12

Residual income = Accounting Profit - Cost of Capital = Accounting Profit - (Value of Assets Used Generate Profit * Expected Financial Return on Those Assets)

Question 13

The amount of profit that investors expect to earn from their investment

Answer 13

Residual Income

Question 14

Based on residual income logic. Can be calculated if NOPAT, Invested Capital and WACC are known. Is used to attempt to adjust accounting income into approximately economic income.

Answer 14

Economic Value Added (EVA)

Question 15

Formula for EVA

Answer 15

EVA = NOPAT - WACC * Capital Invested

Question 16

How can EVA be increased? (3 ways)

Answer 16

1. Increase in operating profit without any additional investment in capital.
2. Invest more capital in projects where return exceeds costs
3. Lower the cost of capital

Question 17

Formula for NOPAT (Net operating profit after tax)

Answer 17

NOPAT = Operating Profit * (1 - Tax rate)
NOPAT = Net income (PAT) + Interest Expense * (1 - Tax rate)

Question 18

Formula for WACC

Answer 18

WACC = (Equity / Equity + debt) * Cost of Equity + (Debt / Equity + Dept) * Cost of dept * (1- Tax rate)