Term
| purpose of measuring assets employed |
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Definition
to provide information that is useful in making sound decisions about assets employed and to motivate managers to make these sound decisions that are in the best interests of the company
-measure the performance of the business unit as an economic entity |
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Term
| two methods of examining and the comparison of assets employed |
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Definition
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Term
| why is it necessary to take assets employed into account |
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Definition
-comparing businesses are not useful unless you use it because it is not helpful directly comparing proft performance
-must judge profits in comparison with the assets used to earn those profits |
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Term
| two performance objectives of managers |
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Definition
-generate adequate profits from the resources at their disposal
-invest in addiontal resources only when the investment will produce an adequate return
-purpose of relating profits to investments is to motivate business unit managers to accomplish these objectives |
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Term
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Definition
ratio equal to income divided by assets employed
-assets employed is equal to the corporate equit in a business unit
-corporate equity = noncurrent liabilities + equity (equity - current liabilities) |
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Term
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Definition
EVA is a dollar amount that is found by subtracting a capital charge from the net operating profit
-capital charge is found by multiplying the amount of assets employed by a rate
-36% of companies using investment centers use EVA |
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Term
| Assets included in measuring assets employed |
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Definition
| cash, accounts receivable, working capital, inventories, ppe, leased assets, idle assets, intangible assets, noncurrent liabilitis |
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Term
| problems with PPE valuations |
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Definition
-EVA and ROI can discourage managers from purchasing new equipment as old fully depreciated assets report larger EVAs than new assets
-can ignore this by using gross book value, not net (historical cost and don't account for depreciation)
-disposition of assets - if assets are included at their original cost then the manager is motivated to get rid of them
-annnuity deprecation also accounts for this but isn't widely used |
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Term
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Definition
- comprehensive measure in that anything that affects the financial statements is reflected in this ratio
-simple to calculate, easy to understand, and meaningful in an absolute sense
-common denominator which may be applied to any org unit responsible for profitability regardless of size or type of business
-roi data is available for competitors |
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Term
| 4 reasons to use EVA over ROI |
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Definition
-all business units have the same profit objcetive for comparable investments where the ROI approach provides different different incentives for invesmtnets aross business units
-decisions that increase a center's ROI may decrease its overall profits
-different interest rates may be used for different types of assets
-stronger positive correlation with changes in a company's market value and the best proxy for shareholder value is to create and grow EVA |
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Term
| why are shareholders important to a firm and value creation is critical |
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Definition
-reduces the risk of takeover
-creates currency for aggressiveness in merges and acquisitions
-reduces cost of capital |
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Term
| problems with EVA that should be given additional consideration |
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Definition
-doesn't solve the problem of dealing for fixed assets (using deprecation vs. not including deprecation)
-in response to this many companies do not include fixed assets in this charge but make a seperate interest charge to controllable assets only |
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Term
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Definition
-performed at irregular intervals
-diagnostic instrument that indicate whether the current strategies of a company are satisfactory and if not whether a decision should be made to do something about it
-made as a basis for arriving at breakup value of a company for outsiders considering takeover and determining true value of a company
-focuses on future profitability rather than current or past performance |
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Term
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Definition
-increase in ROI through business process reingeering and productivity gains without increase asset base
-divestment of assets whose ROI is less than cost of capital
-aggressive new investment in which ROI exceeds cost of capital
-increase in sales, PM, or capital efficiency without affecting other variables |
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