Performance Evaluation Flashcards
1
Q
ROE formula?
A
np/sales x sales/assets x assets/equity
2
Q
ROI formula?
A
EBIAT / net investment
3
Q
RI formula?
A
EBIAT - (WACC)(net investment)
(ROI - WACC)(net investment)
4
Q
EVA formula?
A
ROI +- accounting adjustments
5
Q
net investment formula?
A
TA - CLs (operating, not s/t finance)
5
Q
what is EBIAT?
A
operating profit
6
Q
disadvantages of accounting-based evaluation?
A
- manipulation
- focus on cost control, loss of beneficial discretionary expenditure
- do not represent actual cash
7
Q
disadvantages of net profit to evaluate?
A
- focus only on covering costs, no excess returns
- accepts investments that are profitable rather than that return > WACC
- S/T focused
8
Q
adv & disadv of ROI to evaluate?
A
- is a %, easy to compare
- encourages inappropriate asset disposal
- can destroy value/not be goal congruence (evaluate projects using WACC not only ROI)
9
Q
adv & disadv of RI to evaluate?
A
- incorporates WACC as a consideration = goal congruence
- better indicates value creation
- cannot compare
- encourages cutting discretionary exp
- manipulation
10
Q
what does EVA measure?
A
the value added to shareholders
11
Q
what is the purpose of acc-adj in EVA?
A
take acc profit back to FCF (be consistent with DCF)
12
Q
what kinds of adjustments can be made in EVA?
A
- cap and amort any discretionary exp
- inventory = LIFO
- FMOH = period cost
- annuity, not str-line depreciation
13
Q
what is delta EVA?
A
the increase in current year EVA over prior
14
Q
what causes movements in EVA?
A
- higher return on assets
- earning returns > cost of capital for new assets
