ASSUME THE MANAGEMENT HAS SPECIFIED A 19% TARGET RATE OF RETURN

OPTIONS FOR FILL IN THE BLANKS: (PART 5)

______ (Both Divisions are/ Neither division is/ Only the Consumer division is/ Only the paint store division is).... meeting management's target rate of return.

The _______ (Consumer Division/ Paint Division) should work on improving its ______ (Capital Turnover Rate/ Customer Service/ ROI/ Sales/ Total Assets).

OPTIONS FOR FILL IN BLANKS: (PART 6)

Most companies use the _______ (Average/ Beginning/ Ending) asset balance since the income used in the ROI......

The ____ (Gross/ Net) book value is often used because it is easily pulled from the balance sheet. However, ROI using that value will artificially rise over time due to _____ (Acquisitions of property/ Cash Balance/ Depreciation/ Notes Receivable/ Prepaid Expenses)

Data Table The company is segmented into five divisions: Paint Stores (branded retail location), Consumer (paint sold through stores such as Sears, Home Depot, and Lowe's), Automotive (sales to auto manufacturers), International, and Administration. The following is selected hypothetical divisional information for the company's two largest divisions: Paint Stores and Consumer (in thousands of dollars). SalesOperating Income Total Assets Paint Stores..S 3,800,000 $570,000 S 1,900,000 $ 1,400,000 $231,000 2,000,000 Consumer Print Done Requirement 3. Calculate each division's capital turnover. Interpret your results First enter the formula, then calculate the capital turnover for each division. (Round to two decimal places.) Capital turnover Paint Stores times Consumer times The Requirement 4. Use the expanded ROI formula to confirm your results from Requirement 1. Interpret your results First enter the expanded ROI formula, then calculate the ROI for each divis on Enter the Rol as a percent rounded to the nearest hundredth of a percentage XXX% Division is more efficient in generating sales with its assets. ROI Paint Stores Consumer The Consumer Division's profitability on each dollar of sales s an e Paint S Division's efficiency. These results cause the Paint Stores Division's ROl to be es D ision's profitability. However, the Paint Store Di sions s s ni e Consumer ce an the Consumer Division's ROI Requirement 5. Calculate each division's RI. Interpret your results and offer recommendations for any division with negative R First enter he formula, then calculate he RI Enter the amount in thousands or each division. Use pare theses or a minus sig for negative residual ncome RI x. Paint Stores Consumer Interpret your results and offer recommendations for any division with negative RI. | meeting managements target rate of return. The Vshould work on improving its Improving this may help the division achieve positive residual income. Requirement 6. Total asset data were provided in this problem. If you were to gather this information from an annual report, how would you measure total assets? Describe your measurement choices and some of the pros and cons of those choices. Most companies use the Management must also decide whether they wish to use the gross book value of assets or the net book value of assets The book value is often used because it is easily pulled from the balance sheet. However, ROI using that value will artificially rise over time due to Vasset balance since the income used in the ROI calculation is earned over the year Requirement 7. Describe some of the factors that management considers when setting its minimum target rate of return. Requirement 8. Explain why some firms prefer to use RI rather than ROI for performance measurement RI does a better job of Requirement 9. Explain why budget versus actual performance reports are insufficient for evaluating the performance of investment centers. Investment centers are responsible for Budget versus actual performance reports are insuficient because they do not measure