Question 1

Which of the following would not play a strategic role in management compensation?

Accepted Answer

A) Ethical issues. 
B) Strategic conditions facing the firm. 
C) The effect of a change in financial reporting method. 
D) The effect of risk aversion on managers' decision making. 
A) Ethical issues. 
B) Strategic conditions facing the firm. 
C) The effect of a change in financial reporting method. 
D) The effect of risk aversion on managers' decision making.

Question 2

EVA is calculated as:

Accepted Answer

A) EVA Net Income - (Cost of Capital x EVA Invested Capital). 
B) Total Net Income - (Cost of Capital x Invested Capital). 
C) Gross Income - Cost of Capital. 
D) Total Net Income - EVA Net Income. 
E) Accounting earnings adjusted for EVA. 
A) EVA Net Income - (Cost of Capital x EVA Invested Capital). 
B) Total Net Income - (Cost of Capital x Invested Capital). 
C) Gross Income - Cost of Capital. 
D) Total Net Income - EVA Net Income. 
E) Accounting earnings adjusted for EVA.

Question 3

An increase in the market price of a company's common stock will immediately affect its:

Accepted Answer

A) Stock return. 
B) Debt to equity ratio. 
C) Earnings per share. 
D) Economic value added. 
E) Return on equity. 
A) Stock return. 
B) Debt to equity ratio. 
C) Earnings per share. 
D) Economic value added. 
E) Return on equity.

Question 4

If an earnings multiplier is not available for a given firm, the multiplier used in an earnings-based method of valuation of a firm is often estimated from comparable:

Accepted Answer

A)  Taxable entities. 
B)  Industries. 
C)  Firms. 
D)  For-profit firms. 
E)  Publicly-held firms. 
A)  Taxable entities. 
B)  Industries. 
C)  Firms. 
D)  For-profit firms. 
E)  Publicly-held firms.

Question 5

Generally, the current and deferred types of bonus payment options currently in use tend to focus the manager's attention on short-term performance measures, most commonly:

Accepted Answer

A) Division profit. 
B) After tax corporate profit. 
C) Cash flow. 
D) Growth in firm value. 
E) Stock price. 
A) Division profit. 
B) After tax corporate profit. 
C) Cash flow. 
D) Growth in firm value. 
E) Stock price.

Question 6

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.
$\text { Balance Sheet, Dec 31, }$
$\begin{array}{lllll} 
&  2019 & 2018 \
\text { Cash } & \$  340,000 & \$  100,000 \
\text { Accounts Receivable } & \$  350,000 & \$  400,000 \
\text { Inventory } & \$  250,000 & \$  300,000 \
\hline\text { Total Current Assets }&\$940,000&\$800,000\
\text { Long-lived Assets }&1,080,000&1,100,000\
\hline\text { Total Assets }&\$2,020,000&\$1,900,000\
\hline \text { Current Liabilities }&\$200,000&\$300,000\
\text { Long-term Debt } & 600,000 & 500,000 \
\text { Shareholder Equity } & 1,220,000 & 1,100,000\\hline\text { Total Debt and Equity }&\$2,020,000&\$1,900,000
\end{array}$

$\text { Income Statement, for year ended Dec } 31 \text {, }$
$\begin{array}{lcc} 
& 2019 & 2018 \
\text { Sales } & \$ 4,750,000 & \$ 4,500,000 \
\text { Cost of Sales } & 4,100,000 & 4,000,000\\hline
\text { Gross Margin } & 650,000 & 500,000 \
\text { Operating Expenses } & 350,000 & 400,000 \
\hline\text { Operating Income } & 300,000 & 100,000 \
\text { Taxes } & 120,000 & 40,000\\hline
\text { Net Income }&\$180,000&\$60,000\\\text { Cash Flow from Operations } & 2019 & 2018 \
\text { Net Income } & \$  180,000 & \$ 60.000\\text { Plus Depreciation Expense } & 50,000 & 50,000 \
\text { + Decrease (-inc) in AccRec. and Inv. } & 100,000&-\\text { + Increase (-dec) in Cur. Liabl. }&(100,000)&-\
\text { Cash Flow from Operations }&\$230,000&\$110,000
\end{array}$
The value of the company, calculated using the free cash flow multiple for 2019 is:

Accepted Answer

A) $1,220,000 
B) $1,620,000 
C) $2,520,000 
D) $8,400,000 
A) $1,220,000 
B) $1,620,000 
C) $2,520,000 
D) $8,400,000

Question 7

Of the three basic forms of management compensation (salary, bonus, benefits), the fastest growing part of total compensation is:

Accepted Answer

A)  Salary. 
B)  Bonus. 
C)  Benefits. 
D)  Salary and bonus. 
A)  Salary. 
B)  Bonus. 
C)  Benefits. 
D)  Salary and bonus.

Question 8

Brogdon is a ski instructor looking for employment in the Oregon mountains. He has received full-time job offers from two ski lodges, and must choose between them. The two jobs seem equally attractive, so Brogdon wants to choose the lodge which will pay him the higher compensation. Running Elk Lodge offers a wage of $8.00 per hour for a 40 hour week, plus 30% of the fees paid by walk-on pupils desiring private lessons, plus 40% of fees from pupils who specifically request a private lesson from Brogdon. Blustery Ridge Lodge offers a wage of only $6.00 per hour, plus 25% of walk-on privates lesson fees, 45% of request privates lesson fees, and 15% of the fees paid by walk-on groups. Both lodges charge skiers $50 for private lessons and $100 per 5-person group for group lessons. Brogdon's previous experience leads him to expect weekly volume of 15 walk-on privates, 6 request privates, and 20 walk-on groups.
Required:
Which job should Brogdon accept? What factors should Brogdon consider in making his choice?

Accepted Answer

The analysis is a relevant cost analysis

Question 9

Compensation plans for high-level managers and executives are usually explained in the firm's:

Accepted Answer

A) Management Discussion and Analysis (MD&
A) . 
B) Income Statement. 
C) Notes to the Financial Statements. 
D) Proxy Statement. 
A) Management Discussion and Analysis (MD&
A) . 
B) Income Statement. 
C) Notes to the Financial Statements. 
D) Proxy Statement.

Question 10

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.
$\text { Balance Sheet, Dec 31, }$
$\begin{array}{lllll} 
&  2019 & 2018 \
\text { Cash } & \$ 267,000 & \$  100,000 \
\text { Accounts Receivable } & \$  525,000 & \$  400,000 \
\text { Inventory } & \$  450,000 & \$  300,000\\hline
\text { Total Current Assets } & \$ 1,242,000 & \$ 800,000 \
\text { Long-lived Assets } & 1,205,000 &  1,100,000\\hline
\text { Total Assets }&\$2,447,000&\$1,900,000\\hline
\text { Current Liabilities }&\$500,000&\$500\
\text { Long-term Debt } & 600,000 & 500,000 \
\text { Shareholder Equity } & 1,347,000 & 1,100,000\\hline
\text { Total Debt and Equity }&\$2,447,000&\$1,900,000
\end{array}$

$\text { Income Statement, for year ended Dec 31, }$
$\begin{array}{lcc} 
& 2019 & 2018 \
\text { Sales } & \$ 6,250,000 & \$ 5,450,000 \
\text { Cost of Sales } & 5,125,000 & 4,400,000\\hline
\text { Gross Margin } & 1,125,000 & 1,050,000 \
\text { Operating Expenses } & 580,000 & 550,000\\hline
\text { Operating Income } & 545,000 & 500,000 \
\text { Taxes } & 218,000 & 200,000\\hline\text { Net Income }&\$327,000&\$300,000\\
\text { Cash Flow from Operations } & 2019 & 2018 \
\text { Net Income } & \$ 327,000 & \$ 300,000 \
\text { Plus Depreciation Expense } & 125,000 & 125,000\
\text { + Decrease (-inc) in AccRec. and Inv. }7(275,000)&-\
\text { + Increase (-dec) in Cur. Liabl. }&200,000&-\\hline
\text { Cash Flow from Operations }&\$377,000&\$425,000
\end{array}$
The value of the company, calculated using the earnings multiple for 2019 is:

Accepted Answer

A) $1,072,000 
B) $1,347,000 
C) $2,616,000 
D) $2,520,000 
E) $8,437,500 
A) $1,072,000 
B) $1,347,000 
C) $2,616,000 
D) $2,520,000 
E) $8,437,500

Question 11

In service firms, improvement in long term profitability is best measured by all the following except:

Accepted Answer

A) Staff utilization. 
B) Net revenues. 
C) Collections of customer accounts. 
D) Materials usage. 
A) Staff utilization. 
B) Net revenues. 
C) Collections of customer accounts. 
D) Materials usage.

Question 12

Each one of the following is a method for directly measuring the value of a firm's equity except:

Accepted Answer

A) The discounted cash flow method. 
B) Market value. 
C) Sales multiple. 
D) Earnings-based valuation. 
E) Enterprise value. 
A) The discounted cash flow method. 
B) Market value. 
C) Sales multiple. 
D) Earnings-based valuation. 
E) Enterprise value.

Question 13

Harold Small joined Morton Electric Company eight months ago as Vice President of Personnel Administration. Morton Electric Company is a small regional public utility serving 50,000 customers in three communities and the surrounding rural area. Electricity is generated at a central plant, but each community has a substation and its own work crew. The total labor force at the central plant and three substations, exclusive of administrative and clerical personnel, numbers 180 people.

Small designed and introduced a Performance Evaluation and Review System (PERS) shortly after joining Morton. This system was based upon a similar system he had developed and administered in his prior position with a small company. He thought the system had worked well and that it could be easily adapted for use at Morton. The purpose of PERS, as conceived by Small, is to provide a positive feedback system for evaluating employees that would be uniform for each class of employees. Thus, the system would indicate to employees how they were performing on the job and help them correct any shortcomings. The Plant Supervisors and Field Supervisors are responsible for administering the system for the plant workers and the substation crew workers respectively. The General Supervisors are responsible for the Plant/Field Supervisors. Employees get personal PERS Reports monthly informing them of their current status, and there is a review and evaluation every six months.

PERS is based on a point system in an attempt to make it uniform for all workers. There are eight categories for evaluation with a maximum number of points for each category and a total of 100 points for the system. The eight categories for the plant and crew workers and the maximum number of points in each category are as follows.
\(\begin{array}{ll}&\text { Categories }&\text { Points }\
1.&\text {Quality of work }&15\
&\text {Points are deducted if the job must be redone within 48 hours }\
&\text {  of completion.}\
2.&\text { Productivity}&15\
&\text { Points are deducted if the work was not completed within }\
&\text { the time specified for the type of job.}\
3.&\text { Safety on the job}&15\
&\text { Points are deducted if the employee does not use safe }\
&\text { work habits on the job to protect him/herself and others.}\
4.&\text {Neatness of work area or repair truck }&15\
&\text { Points are deducted if the work area or truck is not clean }\
&\text {and neat. }\
5.&\text { Cooperation with fellow workers}&10\
&\text {Points are deducted if an employee does not work well  }\
&\text { with others.}\
6.&\text {Courtesy on the job and with the public }&10\
&\text { Points are deducted if an employee is rude and }\
&\text {unpleasant when there is contact with the public. }\
7.&\text { Appearance}&10\
&\text {Points are deducted if an employee does not wear  }\
&\text {standard work clothing or if the clothing is sloppy and/or  }\&\text {dirty at the beginning of each day. }\
8.&\text { Tardiness/excess absenteeism}&10\
&\text { Points are deducted if an employee arrives late or is absent }\
&\text { for causes other than illness or death in the immediate family. }&100\
\end{array}\)
 The list of categories to evaluate the Plant/Field Supervisors is slightly different.
Each employee begins the year with 100 points. If an infraction in any of the categories is observed, one to five penalty points can be assessed for each infraction. Notification is given to the employee indicating the infraction and the points to be deducted. A worker who is assessed 25 points in any one month or loses all the points in any category in one month is subject to immediate review. Likewise, anytime an employee drops below 40 points, a review is scheduled. The General Supervisor meets with the individual employee and the employee's Plant/Field Supervisor at this review.
If an employee has no infractions during the month, up to 12 points can be restored to the employee's point total - two points each for Categories 1-4 and one point each for Categories 5-8. However, at no time can a worker have more than the maximum allowed in each category or more than 100 points in total.
When Small first introduced PERS to the General Supervisors, they were not sure they liked the system. Small told them how well it had worked where he had used it before. Small's enthusiasm for the system and his likeable personality convinced the General Supervisors that the system had merit.
There were a few isolated problems with the system in the first two months. However, Ray Meyers, a crew worker, is very unhappy with the new system as evidenced by his conversation with Dan Jenkins, a fellow crew worker.
Meyers: "Look at this notice of infraction - I have lost 22 points! I can't believe it!"
Jenkins: "How did your supervisor get you for that many points in such a short period?"
Required:
(1) What are the strengths and weaknesses of the Performance Evaluation and Review system (PERS) in terms of the design for a review and evaluation system and for the expected motivational effects?
(2) What problems might occur in the administration of the PERS system?

Accepted Answer

[Suggested response. Presentation may va

Question 14

Bonus payment options include all of the following except:

Accepted Answer

A) Perks. 
B) Current bonus. 
C) Deferred bonus. 
D) Stock options. 
E) Performance shares. 
A) Perks. 
B) Current bonus. 
C) Deferred bonus. 
D) Stock options. 
E) Performance shares.

Question 15

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.
$\text { Balance Sheet, Dec 31, }$
$\begin{array}{lllll} 
&  2019 & 2018 \
\text { Cash } & \$ 267,000 & \$  100,000 \
\text { Accounts Receivable } & \$  525,000 & \$  400,000 \
\text { Inventory } & \$  450,000 & \$  300,000\\hline
\text { Total Current Assets } & \$ 1,242,000 & \$ 800,000 \
\text { Long-lived Assets } & 1,205,000 &  1,100,000\\hline
\text { Total Assets }&\$2,447,000&\$1,900,000\\hline
\text { Current Liabilities }&\$500,000&\$500\
\text { Long-term Debt } & 600,000 & 500,000 \
\text { Shareholder Equity } & 1,347,000 & 1,100,000\\hline
\text { Total Debt and Equity }&\$2,447,000&\$1,900,000
\end{array}$

$\text { Income Statement, for year ended Dec 31, }$
$\begin{array}{lcc} 
& 2019 & 2018 \
\text { Sales } & \$ 6,250,000 & \$ 5,450,000 \
\text { Cost of Sales } & 5,125,000 & 4,400,000\\hline
\text { Gross Margin } & 1,125,000 & 1,050,000 \
\text { Operating Expenses } & 580,000 & 550,000\\hline
\text { Operating Income } & 545,000 & 500,000 \
\text { Taxes } & 218,000 & 200,000\\hline\text { Net Income }&\$327,000&\$300,000\\
\text { Cash Flow from Operations } & 2019 & 2018 \
\text { Net Income } & \$ 327,000 & \$ 300,000 \
\text { Plus Depreciation Expense } & 125,000 & 125,000\
\text { + Decrease (-inc) in AccRec. and Inv. }7(275,000)&-\
\text { + Increase (-dec) in Cur. Liabl. }&200,000&-\\hline
\text { Cash Flow from Operations }&\$377,000&\$425,000
\end{array}$
The value of the company, calculated using the sales multiple for 2019 is:

Accepted Answer

A) $1,072,000 
B) $1,347,000 
C) $1,620,000 
D) $2,520,000 
E) $8,437,500 
A) $1,072,000 
B) $1,347,000 
C) $1,620,000 
D) $2,520,000 
E) $8,437,500

Question 16

Rules recently established by the Securities and Exchange Commission include a "say on pay" rule that requires:

Accepted Answer

A)  Audit committee review of executive compensation. 
B)  Nonbinding shareholder votes on executive pay. 
C)  Compensation committees as a part of corporate boards. 
D)  Detailed disclosures of executive compensation. 
A)  Audit committee review of executive compensation. 
B)  Nonbinding shareholder votes on executive pay. 
C)  Compensation committees as a part of corporate boards. 
D)  Detailed disclosures of executive compensation.

Question 17

The balanced scorecard evaluation of the firm is an especially strong financial tool because of its:

Accepted Answer

A) Use of qualitative measures. 
B) Use of quantitative measures. 
C) Simplicity in use. 
D) Ability to predict change. 
E) Use of multiple critical success factors (CSFs). 
A) Use of qualitative measures. 
B) Use of quantitative measures. 
C) Simplicity in use. 
D) Ability to predict change. 
E) Use of multiple critical success factors (CSFs).

Question 18

Benefits include all of the following except:

Accepted Answer

A) Travel. 
B) Life insurance. 
C) Medical benefits. 
D) Membership in a fitness club. 
E) Performance shares. 
A) Travel. 
B) Life insurance. 
C) Medical benefits. 
D) Membership in a fitness club. 
E) Performance shares.

Question 19

Common bases of bonus compensation include: $\begin{array}{llll}&\text { Stock } & \text {Balanced } & \text {Strategic Performance }\
&\text { Price} & \text { Scorecard } & \text {Measures }\
\text { A) } & \text { No } & \text { No } & \text { Yes } \
\text { B) } & \text { Yes } & \text { Yes } & \text { Yes } \
\text { C) } & \text { Yes } & \text { No } & \text { No } \
\text { D) } & \text { Yes } & \text { Yes } & \text { No } \
\text { E) } & \text { No } & \text { Yes } & \text { Yes }
\end{array}$

Accepted Answer

A) Option A 
B) Option B 
C) Option C 
D) Option D 
E) Option E 
A) Option A 
B) Option B 
C) Option C 
D) Option D 
E) Option E

Question 20

A CFO whose compensation plan may have had the effect of creating an incentive for unethical actions includes:

Accepted Answer

A) Kenneth Lay 
B) Scott Sullivan 
C) Bernie Madoff 
D) Dennis Kozlowski 
A) Kenneth Lay 
B) Scott Sullivan 
C) Bernie Madoff 
D) Dennis Kozlowski

Which of the following would not play a strategic role in management compensation?

EVA is calculated as:

An increase in the market price of a company's common stock will immediately affect its:

If an earnings multiplier is not available for a given firm, the multiplier used in an earnings-based method of valuation of a firm is often estimated from comparable:

Generally, the current and deferred types of bonus payment options currently in use tend to focus the manager's attention on short-term performance measures, most commonly:

Of the three basic forms of management compensation (salary, bonus, benefits), the fastest growing part of total compensation is:

Compensation plans for high-level managers and executives are usually explained in the firm's:

In service firms, improvement in long term profitability is best measured by all the following except:

Each one of the following is a method for directly measuring the value of a firm's equity except:

Bonus payment options include all of the following except:

Rules recently established by the Securities and Exchange Commission include a "say on pay" rule that requires:

The balanced scorecard evaluation of the firm is an especially strong financial tool because of its:

Benefits include all of the following except:

Common bases of bonus compensation include: Stock Balanced Strategic Performance Price Scorecard Measures A) No No Yes B) Yes Yes Yes C) Yes No No D) Yes Yes No E) No Yes Yes

A CFO whose compensation plan may have had the effect of creating an incentive for unethical actions includes:

Cost Management and Strategy

Implementing Strategy: The Value Chain, the Balanced Scorecard, and the Strategy Map

Basic Cost Management Concepts

Job Costing

Activity-Based Costing and Customer Profitability Analysis

Process Costing

Cost Allocation: Departments, Joint Products, and By-Products

Cost Estimation

Short-Term Profit Planning: Cost-Volume-Profit CVP Analysis

Strategy and the Master Budget

Decision Making With a Strategic Emphasis

Strategy and the Analysis of Capital Investments

Cost Planning for the Product Life Cycle: Target Costing, Theory of Constraints, and Strategic Pricing

Operational Performance Measurement: Sales, Direct-Cost Variances, and the Role of Nonfinancial Performance Measures

Operational Performance Measurement: Indirect-Cost Variances and Resource-Capacity Management

Operational Performance Measurement: Further Analysis of Productivity and Sales

The Management and Control of Quality

Strategic Performance Measurement: Cost Centers, Profit Centers, and the Balanced Scorecard

Strategic Performance Measurement: Investment Centers and Transfer Pricing

Filters

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

Which of the following would not play a strategic role in management compensation?

EVA is calculated as:

An increase in the market price of a company's common stock will immediately affect its:

If an earnings multiplier is not available for a given firm, the multiplier used in an earnings-based method of valuation of a firm is often estimated from comparable:

Generally, the current and deferred types of bonus payment options currently in use tend to focus the manager's attention on short-term performance measures, most commonly:

Of the three basic forms of management compensation (salary, bonus, benefits), the fastest growing part of total compensation is:

Compensation plans for high-level managers and executives are usually explained in the firm's:

In service firms, improvement in long term profitability is best measured by all the following except:

Each one of the following is a method for directly measuring the value of a firm's equity except:

Bonus payment options include all of the following except:

Rules recently established by the Securities and Exchange Commission include a "say on pay" rule that requires:

The balanced scorecard evaluation of the firm is an especially strong financial tool because of its:

Benefits include all of the following except:

Common bases of bonus compensation include: Stock Balanced Strategic Performance Price Scorecard Measures A) No No Yes B) Yes Yes Yes C) Yes No No D) Yes Yes No E) No Yes Yes

A CFO whose compensation plan may have had the effect of creating an incentive for unethical actions includes:

Cost Management and Strategy

Implementing Strategy: The Value Chain, the Balanced Scorecard, and the Strategy Map

Basic Cost Management Concepts

Job Costing

Activity-Based Costing and Customer Profitability Analysis

Process Costing

Cost Allocation: Departments, Joint Products, and By-Products

Cost Estimation

Short-Term Profit Planning: Cost-Volume-Profit CVP Analysis

Strategy and the Master Budget

Decision Making With a Strategic Emphasis

Strategy and the Analysis of Capital Investments

Cost Planning for the Product Life Cycle: Target Costing, Theory of Constraints, and Strategic Pricing

Operational Performance Measurement: Sales, Direct-Cost Variances, and the Role of Nonfinancial Performance Measures

Operational Performance Measurement: Indirect-Cost Variances and Resource-Capacity Management

Operational Performance Measurement: Further Analysis of Productivity and Sales

The Management and Control of Quality

Strategic Performance Measurement: Cost Centers, Profit Centers, and the Balanced Scorecard

Strategic Performance Measurement: Investment Centers and Transfer Pricing

Filters