Flashcards in Performance Measures 1 Deck (14):
What four perspectives are included in Balanced Scorecard?
Financial / Customer / Internal Business Processes / Learning and Growth
Why was Balanced Scorecard created?
To measure Performance.
What are Strategy Maps?
Diagrams of Strategic Cause and Effect Relationships.
What is a Strategic Initiative?
A plan to achieve goals.
What measures are used under Value-Based Management?
Return on Investment
Economic Value Added
Free Cash Flow
How is Return on Investment (ROI) calculated?
ROI : Return / Investment
Example: You Invest $100 to buy a machine that generates $60 in Operating Income
$60 / $100 : 60% ROI
How is Residual Income calculated?
Operating Income - (Required Rate of Return x Invested Capital) : Residual Income
What is another name for Required Rate of Return (RROR)?
RROR is also called 'Cost of Capital'
What is Weighted Average Cost of Capital (WACC)? How is it calculated?
Cost of Capital is the weighted average of the interest rates you pay for your Capital.
Includes Debt and the Rate of Return your Equity Shareholders expect
Example: 45% of your Capital is supported by debt and has an interest rate of 9%. 55% of your Capital is supported by equity and shareholders expect a ROR of 12%
Your Cost of Capital is: (.45 x .09) + (.55 x .12) : 10.65%
How is Spread calculated?
Spread : ROI - Cost of Capital
What is the primary point of Economic Value Added? How is it calculated?
Investments should exceed costs- with an emphasis on stockholder value.
Economic Value Added : Operating Income After Tax - (Net Assets x WACC)
How is Free Cash Flow calculated?
Operating Income After Tax
+ Depreciation & Amortization
- Capital Expenditures
- Change in Net Working Capital
: Free Cash Flow
What is measured by Six Sigma?
It measures a product versus its quality goal.