During the current year, a strategic business unit (SBU) within Roke Inc. saw costs increase by \(\$ 2\) million, revenues increase by \(\$ 4\) million, and assets decrease by \(\$ 1\) million. SBUs are set up by Roke as follows I. cost SBU II. Revenue SBU III. Profit SBU IV. Investment SBU Given the numbers above, a SBU manager will receive a favorable performance review if she is responsible for a: a. I or IV only. b. II or III only. c. I, II, or IV only. d. II,III, or IV only.
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ROI, RI, EVA. Hamilton Corp. is a reinsurance and financial services company. Hamilton strongly believes in evaluating the performance of its stand-alone divisions using financial metrics such as R0l and residual income. For the year ended December \(31,2017,\) Hamilton's CF0 received the following information about the performance of the property/casualty division: For the purposes of divisional performance evaluation, Hamilton defines investment as total assets and income as operating income (that is, income before interest and taxes). The firm pays a flat rate of \(25 \%\) in taxes on its income. 1\. What was the net income after taxes of the property/casualty division? 2\. What was the division's ROI for the year? 3\. Based on Hamilton's required rate of return of \(8 \%\), what was the property/casualty division's residual income for \(2017 ?\) 4\. Hamilton's CF0 has heard about EVA and is curious about whether it might be a better measure to use for evaluating division managers. Hamilton's four divisions have similar risk characteristics. Hamilton's debt trades at book value while its equity has a market value approximately \(150 \%\) that of its book value. The company's cost of equity capital is \(10 \%\). Calculate each of the following components of EVA for the property/casualty division, as well as the final EVA figure: a. Net operating profit after taxes b. Weighted-average cost of capital c. Investment, as measured for EVA calculations
Describe moral hazard.
ROI and RI with manufacturing costs. Excellent Motor Company makes electric cars and has two products, the Simplegreen and the Excellentgreen. To produce the Simplegreen, Excellent Motor employed assets of \(\$ 10,500,000\) at the beginning of 2017 and \(\$ 14,450,000\) of assets at the end of \(2017 .\) Other costs to manufacture the Simplegreen include the following: General administration and selling costs for Simplegreen total \(\$ 7,820,000\) in 2017 . During the year, Excellent Motor produced 11,000 Simplegreen cars using 6,000 setup-hours and 139,000 machine-hours. It sold these cars for $\$ 12,000$ each. 1\. Assuming that Excellent Motor defines investment as average assets during the period, what is the return on investment for the Simplegreen division? 2\. Calculate the residual income for Simplegreen if Excellent Motor has a required rate of return of \(16 \%\) on investments.
Describe two disclosures required by the SEC with respect to executive compensation.
Why is it important to distinguish between the performance of a manager and the performance of the organization subunit for which the manager is responsible? Give an example.
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