Formulas 2.4

Question 1

ROI

Answer 1

• income / IC = income / revenue * revenue / IC
• return in sales * capital turnover

Question 2

ROS

Answer 2

Income / revenues

Question 3

Capital Turnover

Answer 3

revenues / IC

Question 4

Downsides of income measures?

1.
2.
3.

Answer 4

• focus too narrowly on income and not considering resources required to generate income
• important to also keep in mind when evaluating managers
• also can be misleading when comparing

Question 5

What’s good about ROI?

1.
2.

+1 potential bad thing?

Answer 5

• takes into account investment needed for that income
• easier to compare units performance with other segments because it’s a return per unit of investment and does not depend on size of segments
• might still not align incentives for managers with goals of the organization

Question 6

Invested Capital

Answer 6

working capital + permanent investment

Question 7

Economic Profit

Answer 7

Net Operating Profit after tax income (NOPAT) - (weighted average cost of capital * average invested capital)

Question 8

NOPAT

Answer 8

operating profit * (1-tax rate)

Question 9

capital charge

Answer 9

weighted average cost of capital * average invested capital

i.e cost of capital * invested capital

Question 10

Economic Profit tells you….

Answer 10

…. the amount by which after tax operating income exceeds the cost of the capital employed to generate that income

Question 11

ROIC

Answer 11

NOPAT / average IC

Question 12

1. Capital Spread Formula
2. Value Spread Formula

Answer 12

1. EP = NOPAT - (weighted average cost of capital * average invested capital)
2. EP = (ROIC - weighted average cost of capital) * average invested capital

Question 13

Name the Seven Components of the Master Budget

Answer 13

sales budget

COGS (purchase budget)

other operating expense budget

budgeted income statement

capital budget

cash budget

budgeted balance sheet