Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN: 9781305970663
Author: Don R. Hansen, Maryanne M. Mowen
Publisher: Cengage Learning
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Textbook Question
Chapter 10, Problem 20E
The key difference between residual income and EVA is that EVA
- a. uses the actual cost of capital for the company rather than a minimum required cost of capital.
- b. uses the minimum required cost of capital for a company rather than the actual percentage cost of capital.
- c. is a ratio rather than an absolute dollar amount.
- d. cannot be negative.
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Students have asked these similar questions
Which of the following statements is most accurate?
A.
Financial leverage is directly related to operating leverage.
B.
Increasing the corporate tax rate will not affect capital structure decisions.
C.
A firm with low operating leverage has a small proportion of its total costs in fixed costs.
D.
Total costs can be calculated as net income minus total revenue.
Consider the following statements about residual income:
Residual income incorporates a firm's cost of acquiring investment capital.
Residual income is a percentage measure, not a dollar measure.
If used correctly, residual income may result in division managers making decisions that are in their own best interest and not in the best interest of the entire firm.
Which of the above statements is (are) true?
a.1 only
b. 1 and 2
c. 2 and 3
d. 1 and 3
Which of the following statements regarding economic capital and economic income is incorrect?
(i) Economic income measurements are typically more subjective than measurements of accounting income based on historical cost
(ii) Economic capital is a forward-looking concept, which requires making ex-ante estimations
(iii) The measurement of economic income for a given accounting period is typically different from the accounting income based on historical cost
(iv) The computation of economic capital requires present-value calculations
(v) Economic income can be defined as the maximum consumption possible without reducing the value of capital
(vi) The measurement of economic capital typically does not include unrealised cash flows
a. (i)
b. (ii)
c. (iii)
d. (iv)
e. (v)
f. (vi)
Chapter 10 Solutions
Cornerstones of Cost Management (Cornerstones Series)
Ch. 10 - Prob. 1DQCh. 10 - Explain why firms choose to decentralize.Ch. 10 - Explain how access to local information can...Ch. 10 - What are margin and turnover? Explain how these...Ch. 10 - What are the three benefits of ROI? Explain how...Ch. 10 - What are two disadvantages of ROI? Explain how...Ch. 10 - What is residual income? Explain how residual...Ch. 10 - Prob. 8DQCh. 10 - Prob. 9DQCh. 10 - What is a transfer price?
Ch. 10 - Prob. 11DQCh. 10 - If the minimum transfer price of the selling...Ch. 10 - If an outside, perfectly competitive market exists...Ch. 10 - Prob. 14DQCh. 10 - Prob. 15DQCh. 10 - Forchen, Inc., provided the following information...Ch. 10 - Refer to Cornerstone Exercise 10.1. Forchen, Inc.,...Ch. 10 - Ignacio, Inc., had after-tax operating income last...Ch. 10 - Prob. 4CECh. 10 - Prob. 5CECh. 10 - Prob. 6CECh. 10 - Jarriot, Inc., presented two years of data for its...Ch. 10 - Refer to Exercise 10.7 for data. At the end of...Ch. 10 - Refer to the data given in Exercise 10.8....Ch. 10 - Brewster Company manufactures elderberry wine....Ch. 10 - Xenold, Inc., manufactures and sells cooktops and...Ch. 10 - Prob. 12ECh. 10 - Jocassee Furniture Manufacturing, Inc., has a...Ch. 10 - Prob. 14ECh. 10 - Mossfort, Inc., has a division in Canada that...Ch. 10 - A multinational corporation has a number of...Ch. 10 - Consider the data for each of the following four...Ch. 10 - The following selected data pertain to the Argent...Ch. 10 - Prob. 19ECh. 10 - The key difference between residual income and EVA...Ch. 10 - If sales and average operating assets for Year 2...Ch. 10 - Prob. 22ECh. 10 - Refer to 10.22. If the imputed interest rate is...Ch. 10 - A company had WACC (weighted average cost of...Ch. 10 - Prob. 25PCh. 10 - Raddington Industries produces tool and die...Ch. 10 - Prob. 27PCh. 10 - Prob. 28PCh. 10 - Oriole, Inc., owns a number of food service...Ch. 10 - Prob. 30PCh. 10 - Prob. 31PCh. 10 - Renslen, Inc., a truck manufacturing conglomerate,...Ch. 10 - Jump Start Company (JSC), a subsidiary of Mason...Ch. 10 - Prob. 34PCh. 10 - Grate Care Company specializes in producing...
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- The key difference between residual income and EVA is that EVA a. uses the actual cost of capital for the company rather than a minimum required cost of capital. b. uses the minimum required cost of capital for a company rather than the actual percentage cost of capital. c. is a ratio rather than an absolute dollar amount. d. cannot be negative. e. There is no difference between residual income and EVA.arrow_forwardProfitability Index is used when: A. projects are not divisible and the company is in capital rationing situation B. projects are divisible and the company is not in capital rationing situation C. projects are divisible and the company is in capital rationing situation D. projects are not divisible and the company is not in capital rationing situationarrow_forward1.Describe the components included in weighted average cost of capital. How do you determine a "good" cost of capital? Identify the factors that may affect a company’s cost of capital. lessarrow_forward
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- The measurement of earnings concept that consists of a companys profit from operations after taxed are subtracted is ________. A. ROI B. EPS C. EBITDA D. NOPATarrow_forwardConsider the following statements: 1. Businesses that are capital intensive tend to have high operating gearing. 2. Businesses with relatively high total variable cost compared with their total fixed cost, at their normal level of activity, are said to have high operating gearing. Are the above statements true or false?arrow_forwardDoes a decrease in the capital requirement ratio always cause anincrease in the value of operations?arrow_forward
- Webster Company has compiled the information shown in the following table attached: . a. Calculate the weighted average cost of capital using book value weights. b. Calculate the weighted average cost of capital using market value weights. c. Compare the answers obtained in parts a and b. Explain the differences.arrow_forwardWhat analysis ensures that the income for the firm will cover its variable costs? a. ratio analysis b. financial analysis c. cost volume profit analysis d. sales analysisarrow_forwardThe user cost of capital does NOT depend on a. The real interest rate b. The unit price of capital c. The depreciation rate s. The marginal product of capitalarrow_forward
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