Exam 20: Management Compensation, Business Analysis, and Business Valuation

Which one of the following forms of compensation includes special services and benefits for the employee?

Performance shares grant stock for achieving certain performance goals:

Boating Inc. manufactures water vessels and is organized into three large divisions: jet skis, fishing boats, and yachts. The following information presents operating revenues, operating incomes and invested assets of the company over the last three years: (All figures in 000s.) Operating Revenue Operating Income Invested Assets Jet Skis 2018 \ 2,000 \ 500 \ 1,200 2019 3,000 700 1,500 2020 4,000 1,000 2,000 Fishing Boats 2018 5,000 3,000 2,000 2019 5,000 2,500 1,500 2020 4,000 2,000 1,500 Yachts 2018 8,000 4,000 3,000 2019 7,000 3,000 2,500 2020 8,000 3,500 3,000 The following table shows the number of managers covered by the current compensation package of Boating Inc.: Number of Executives Jet Skis Fishing Boats Yachts 2018 50 200 250 2019 60 180 200 2020 70 160 250 The current compensation package is an annual bonus award. The managers share in the bonus pool. The pool is calculated as 10% of the annual residual income of the company. The residual income is defined as operating income minus an interest charge of 14% of invested assets. Required: (1) Compute the bonus amount to be paid during each year. Also, compute (average) individual executive bonus amounts. (2) If the bonus were calculated by divisional residual income, what would be the bonus amounts?

Which of the following is one of the most comprehensive bases of compensation?

The King Mattress Company had the following operating results for 2018-2019. In addition, the company paid dividends in both 2018 and 2019 of $60,000 per year and made capital expenditures in both years of $30,000 per year. The company's stock price in 2018 was $8 and $7 in 2019. The industry average earnings multiple for the mattress industry was 9 in 2019 and the free cash flow and sales multiples were 18 and 1.5, respectively. The company is publicly owned and has 1,200,000 shares of outstanding stock at the end of 2019. $\text { Balance Sheet, Dec 31, }$ 2019 2018 Cash \ 340,000 \ 100,000 Accounts Receivable \ 350,000 \ 400,000 Inventory \ 250,000 \ 300,000 Total Current Assets \9 40,000 \8 00,000 Long-lived Assets 1,080,000 1,100,000 Total Assets \2 ,020,000 \1 ,900,000 Current Liabilities \2 00,000 \3 00,000 Long-term Debt 600,000 500,000 Shareholder Equity 1,220,000 1,100,000 Total Debt and Equity \2 ,020,000 \1 ,900,000 $\text { Income Statement, for year ended Dec } 31 \text {, }$ 2019 2018 Sales \ 4,750,000 \ 4,500,000 Cost of Sales 4,100,000 4,000,000 Gross Margin 650,000 500,000 Operating Expenses 350,000 400,000 Operating Income 300,000 100,000 Taxes 120,000 40,000 Net Income \1 80,000 \6 0,000 Cash Flow from Operations 2019 2018 Net Income \ 180,000 \ 60.000 Plus Depreciation Expense 50,000 50,000 + Decrease (-inc) in AccRec. and Inv. 100,000 - + Increase (-dec) in Cur. Liabl. (100,000) - Cash Flow from Operations \2 30,000 \1 10,000 The current ratio for 2019 is:

Jackson Supply Company has a 2 to 1 current ratio.This ratio would increase to more than 2 to 1 if the company:

In service firms, financial results can be measured by all the following except:

The King Mattress Company had the following operating results for 2018-2019. In addition, the company paid dividends in both 2018 and 2019 of $60,000 per year and made capital expenditures in both years of $30,000 per year. The company's stock price in 2018 was $8 and $7 in 2019. The industry average earnings multiple for the mattress industry was 9 in 2019 and the free cash flow and sales multiples were 18 and 1.5, respectively. The company is publicly owned and has 1,200,000 shares of outstanding stock at the end of 2019. $\text { Balance Sheet, Dec 31, }$ 2019 2018 Cash \ 340,000 \ 100,000 Accounts Receivable \ 350,000 \ 400,000 Inventory \ 250,000 \ 300,000 Total Current Assets \9 40,000 \8 00,000 Long-lived Assets 1,080,000 1,100,000 Total Assets \2 ,020,000 \1 ,900,000 Current Liabilities \2 00,000 \3 00,000 Long-term Debt 600,000 500,000 Shareholder Equity 1,220,000 1,100,000 Total Debt and Equity \2 ,020,000 \1 ,900,000 $\text { Income Statement, for year ended Dec } 31 \text {, }$ 2019 2018 Sales \ 4,750,000 \ 4,500,000 Cost of Sales 4,100,000 4,000,000 Gross Margin 650,000 500,000 Operating Expenses 350,000 400,000 Operating Income 300,000 100,000 Taxes 120,000 40,000 Net Income \1 80,000 \6 0,000 Cash Flow from Operations 2019 2018 Net Income \ 180,000 \ 60.000 Plus Depreciation Expense 50,000 50,000 + Decrease (-inc) in AccRec. and Inv. 100,000 - + Increase (-dec) in Cur. Liabl. (100,000) - Cash Flow from Operations \2 30,000 \1 10,000 The value of the company, calculated using the sales multiple for 2019 is:

A bonus plan differs from a salary in terms of:

Which one of the following forms of compensation is a based upon the achievement of performance goals for a period?

Which of the following is not a key category in determining bonus pay plans?

Mobile Business Incorporated (MBI) is a worldwide manufacturing company that specializes in high technology products for the aerospace, automotive and plastics industries.The state-of-the-art technology and business innovation have been key to MBI's success over the last ten years. After a meeting of the board of directors, there was some feeling that the company was moving away from its goal of striving to maintain and expand its global position through innovative management teams. One area of concern was with the company's bonus compensation package.The company's current bonus plan focuses on giving reward based on the utilization of capital within the company, i.e.management of inventory, collection of receivables and use of physical assets.Even with such a state of the art bonus plan, the board of directors is concerned with the short-term focus of the compensation package.MBI's basis in current financial standards suggests that the future period consequences of managerial actions will not be reflected when presenting bonus compensation. Required: Help MBI solve the problem of basing bonuses on short-term decisions.Develop a bonus package that takes into consideration the long-term financial position of MBI.

Topaz Industries operates several large plants that provide the packaging for many consumer products. The company has a progressive compensation system that is market-based and competitive with that of similar companies. Every position within Topaz is assigned a grade level from 1 to 30, with 30 being the company's chairman and 1 the lowest-level unskilled position. In assigning the grade levels, Topaz uses the following methodology: ● The higher-level positions are classified according to the exact titles used by similar firms. ● The lower-level positions are classified on the following factors: ● Formal education attained. ● Amount of responsibility. ● Complexity of tasks. ● Effects of mistakes. ● Physical difficulty or amount of effort. ● Salary ranges increase annually according to the rate of inflation. When Topaz hires employees, they are generally offered a starting salary at the lower end of the position grade level. For an individual with exceptional skills or experience, the offer could be closer to the top of the level. Employees can move through the levels on the basis of performance and merit increases; a promotion moves the employee into a new position level with a higher salary range. Topaz provides various in-house educational programs for its employees and has a tuition reimbursement program. Jill Simon, assistant controller for one of Topaz's plants, was hired a year ago at the top level for her position because of her extensive experience in the field. She has just learned that her annual increase will be 3 percent of her salary, the same percentage used to increase all position levels in the current year. Jill believes that her performance merits a larger increase but knows that as long as she remains an assistant controller at the top level, her future salary increases will be similar. Jon Russell is an administrative secretary reporting to Topaz's treasurer. Jon has been with the company for several years, earning his current position two years ago through above-average performance. Because Jon has proved to be reliable and efficient, his boss has transferred responsibility for many routine tasks to him. Jon believes that his position should be reevaluated because of these increased duties, but he has not received any encouragement from his boss concerning this. Billy Hampton was recently promoted to supervisor in one of the packaging plants, directing the work of 15 employees. He started at Topaz as a shipping clerk after completing high school and has learned the packaging business on the job by holding increasingly important positions over the years. Many of Billy's co-supervisors are better educated than he is, but lack his experience and frequently turn to him for solutions to their problems. Billy knows that these less-experienced supervisors earn more than he does because of their educational qualifications. Although he is confident that his salary will catch up with the others through merit increases, he does not believe that the company has been entirely fair with him. Required: 1) Describe the incentive effects that Topaz Industries' job evaluation and compensation program is likely to have on Jill Simon, Jon Russell, and Billy Hampton. 2) Recommend several ways that the firm could improve its evaluation and compensation program to avoid situations similar to those described here. 3) Describe the general conditions that must be present for employees to be motivated to improve their performance under a merit pay system.

If fairness only is considered, if a unit manager's unit is doing well, the unit manager prefers:

Which one of the following has been the most common payment option for bonus compensation in recent years?

Household Brands Inc. (HBI) manufactures household goods in the United States. The company made two acquisitions in previous years to diversify their product lines. In 2011, HBI acquired cosmetics and consumer electronics companies. HBI is now, in 2020, comprised of three divisions: cosmetics, household, and consumer electronics. The following information (in thousands of dollars) presents operating revenues, operating income, and invested assets of the company over the last three years: Revenue Operating Income Assets Cosmetics 2018 \ 24,500 \ 2,300 \ 10,000 2019 22,500 1,900 10,000 2020 19,600 1,800 9,500 Household 2018 17,400 1,300 7,500 2019 15,300 1,100 8,000 2020 12,500 900 6,500 Electronics 2018 13,500 1,500 4,500 2019 9,500 1,100 4,500 2020 8,700 1,050 4,300 Household Brands Total 2018 55,400 5,100 22,000 2019 47,300 4,100 22,500 2020 40,800 3,750 20,300 The current compensation package is an annual bonus award. The senior executives share in the bonus pool. The pool is calculated as 20% of the annual residual income of the company. The residual income is defined as operating income minus a cost of capital charge of 15% of invested assets. Round all calculations to two significant digits. Return on assets for the cosmetics division in 2018 is:

Risk aversion by managers should be recognized when revising compensation plans because:

Ginyard Company has the following financial statements for the year ended December 31, 2019. $\text { Balance Sheet, 12/31/2019 }$ Cash \ 1,600,000 Accounts Receivable 3,000,000 Inventory 2,500,000 Current Assets \ 7,100,000 Long-lived Assets 14,500,000 Total Assets \2 1,600,000 Current Liabilities \ 1,200,000 Long-term Debt \ 2,400,000 Shareholder Equity 18,000,000 Total Debt and Equity \2 1,600,000 $\text { Income Statement }$ $\text { For the year ended December } 31,2019$ Sales \ 20,000,000 Cost of Sales 15,000,000 Gross Margin 5,000,000 Operating Expenses 2,500,000 Operating Income 2,500,000 Taxes 1,000,000 Net Income \ 1,500,000 $\text { Cash Flow From Operations }$ $\text { For the year ended December } 31,2019$ Net Income \ 1,500,000 Plus Depreciation Expense 1,000,000 + Decrease (-inc) in AccRec and Inv. - +Increase (-dec) in Cur. Liabl. - Cash Flow from Operations \2 ,500,000 $\text { Some additional information about } 2019 \text { includes: }$ Ginyard Industry Data Year End Stock Price \ 23.00 Number of Outstanding Shares 1,800,000 Sales Multiplier 2.10 Free Cash Flow Multiplier 22.00 Earnings Multiplier 18.00 Cost of Capital 5.0\% Accounts Receivable Turnover 6.60 Inventory Turnover 5.80 Current Ratio 2.20 Quick Ratio 1.50 Cash Flow from Operations Ratio 1.50 Free Cash Flow Ratio 1.00 Gross Margin Percentage 30.0\% Return on Assets (Net Book Value) 18.0\% Return on Equity 22.0\% Training Expense 500,000 Income Tax Rate 40\% Depreciation Expense 1,000,000 Dividends - Required: 1. Complete a business analysis of Ginyard Company for 2019. 2. Complete a business valuation for Ginyard Company for 2019.

The King Mattress Company had the following operating results for 2018-2019. In addition, the company paid dividends in both 2018 and 2019 of $60,000 per year and made capital expenditures in both years of $30,000 per year. The company's stock price in 2018 was $8 and $7 in 2019. The industry average earnings multiple for the mattress industry was 9 in 2019 and the free cash flow and sales multiples were 18 and 1.5, respectively. The company is publicly owned and has 1,200,000 shares of outstanding stock at the end of 2019. $\text { Balance Sheet, Dec 31, }$ 2019 2018 Cash \ 340,000 \ 100,000 Accounts Receivable \ 350,000 \ 400,000 Inventory \ 250,000 \ 300,000 Total Current Assets \9 40,000 \8 00,000 Long-lived Assets 1,080,000 1,100,000 Total Assets \2 ,020,000 \1 ,900,000 Current Liabilities \2 00,000 \3 00,000 Long-term Debt 600,000 500,000 Shareholder Equity 1,220,000 1,100,000 Total Debt and Equity \2 ,020,000 \1 ,900,000 $\text { Income Statement, for year ended Dec } 31 \text {, }$ 2019 2018 Sales \ 4,750,000 \ 4,500,000 Cost of Sales 4,100,000 4,000,000 Gross Margin 650,000 500,000 Operating Expenses 350,000 400,000 Operating Income 300,000 100,000 Taxes 120,000 40,000 Net Income \1 80,000 \6 0,000 Cash Flow from Operations 2019 2018 Net Income \ 180,000 \ 60.000 Plus Depreciation Expense 50,000 50,000 + Decrease (-inc) in AccRec. and Inv. 100,000 - + Increase (-dec) in Cur. Liabl. (100,000) - Cash Flow from Operations \2 30,000 \1 10,000 The market value of the company's equity for 2019 is:

The Harrison Bicycle Company had the following operating results for 2018-2019. In addition, the company paid dividends in both 2018 and 2019 of $80,000 per year and made capital expenditures in both years of $230,000 per year. The company's stock price in 2018 was $14.20 and $12.50 in 2019. Also in 2019, the industry average earnings multiple for the bicycle industry was 8 and the free cash flow and sales multiples were 16 and 1.35, respectively. The company is publicly owned and has 1,400,000 shares of outstanding stock at the end of 2019. $\text { Balance Sheet, Dec 31, }$ 2019 2018 Cash \ 267,000 \ 100,000 Accounts Receivable \ 525,000 \ 400,000 Inventory \ 450,000 \ 300,000 Total Current Assets \ 1,242,000 \ 800,000 Long-lived Assets 1,205,000 1,100,000 Total Assets \2 ,447,000 \1 ,900,000 Current Liabilities \5 00,000 \5 00 Long-term Debt 600,000 500,000 Shareholder Equity 1,347,000 1,100,000 Total Debt and Equity \2 ,447,000 \1 ,900,000 $\text { Income Statement, for year ended Dec 31, }$ 2019 2018 Sales \ 6,250,000 \ 5,450,000 Cost of Sales 5,125,000 4,400,000 Gross Margin 1,125,000 1,050,000 Operating Expenses 580,000 550,000 Operating Income 545,000 500,000 Taxes 218,000 200,000 Net Income \3 27,000 \3 00,000 Cash Flow from Operations 2019 2018 Net Income \ 327,000 \ 300,000 Plus Depreciation Expense 125,000 125,000 + Decrease (-inc) in AccRec. and Inv. 7(275,000) - + Increase (-dec) in Cur. Liabl. 200,000 - Cash Flow from Operations \3 77,000 \4 25,000 The book value of the company's equity for 2019 is: