100% satisfaction guarantee Immediately available after payment Both online and in PDF No strings attached
logo-home
Financial Management summary IBO Y3 $8.09
Add to cart

Summary

Financial Management summary IBO Y3

 37 views  7 purchases
  • Course
  • Institution
  • Book

CH23: Performance measurement, compensation and multinational considerations | Chapter 5: Activity-based costing and activity-based management | Chapter 13: Strategy, balanced scorecard, and strategic profitability analysis | Chapter 22: Management-control systems, transfer pricing, and multination...

[Show more]

Preview 2 out of 15  pages

  • No
  • Ch23, ch5, ch13, ch22,
  • September 28, 2021
  • 15
  • 2020/2021
  • Summary
avatar-seller
Financial management
Week 1
CH23: Performance measurement, compensation and multinational considerations

How to measure and monitor the performance of a company?
- Financial perspective: stock price, ROI, ROA, EVA.
- Customer perspective: market share, customer satisfaction, # repeat visitors.
- Internal business process perspective: quality, cleanliness, time to…
- Learning and growth perspective: employee turnover, education levels.
Monitor: Business Balance Score Card

Most commonly focus areas: financial / customer / internal business processes / learning and
growing.




Decentralization:
- Plenty of advantages, used by vast majority of international operating companies (to
optimize the value of the company).
- A disadvantage is that it is difficult to make sure that every department performs well,
goal congruence, performance measurement.

Four common measures of economic performance:
1. Return on investment.
2. Residual income.
3. Economic value added.
4. Return on sales (does not account for investment).
Selecting subunit operating income as a metric is inappropriate because it obviously differs
simply on the differing size of subunits.

Designing accounting-based performance measures requires some steps:
1. Choose performance measures that align with top management’s financial goals
(goal congruence).
2. Choose the level of details of each performance measures.
3. Choose a target level of performance.
4. Choose a feedback mechanism for each performance measure.

DuPont system of analysis = a system used to dissect the firm’s financial statements and to
assess its financial condition.
- The advantage of the DuPont system is that it allows the firm to break its ROE into a
profit-on-sales component (net profit margin), an efficiency-of-asset use component
(total asset turnover), and a use-of-financial-leverage component (financial leverage
multiplier).

, - Analysts can decompose the total return to owners into these components:
net income sales total assets
ROE= x x
sales total assets average shareholder equity

DuPont formula = multiplies the firm’s net profit margin by its total asset turnover to calculate
the return on assets (ROA).
Modified DuPont formula = relates the firm’s ROA to its ROE using the FLM.

total assets
Financial leverage multiplier (FLM) = . This is the ratio linking ROA to
common stock equity
ROE.
- ROE = ROA x FLM

Return on Total Assets (ROA) =
earnings available for common stockholders earnings available for common stockholders sales
= x
totel assets sales total assets
.
- ROA indicates how efficiently you use your assets to generate sales.

Return on Common Equity (ROE) =
earnings available for common stockholders earnings available for common stockholders total assets
= x
common sotck equity total assets common sotck equ

- ROE focuses on the equity invested in the company, instead of the assets.
- ROE = ROA x financial leverage OR net profit turnover x asset turnover x financial
leverage.

ROE > ROA if earnings are positive. ROE < ROA if earnings are negative.
Dangers of using profitability ratios (particularly when using ROE): it is easy to be fooled by
the numbers. Therefore, we have to consider as company’s financial leverage = the degree
that a company increases its financial risk with the aim to increase its return. ROA does not
discriminate on how it was financed; it just tells how efficient you are with your total assets.
Higher financial leverage means higher risks! The challenge of financial leverage is to strike
a balance between the benefits and costs of debt financing.

income income revenues
Return on Investment (ROI) = = x
investment revenues investment
Can also be written as, return on sales x investment turnover
- With income, we mean operating income (EBIT) when measuring.
- Most popular messages for two reasons:
1. Blends all ingredients of profitability (revenues, costs, and investment) into a
single percentage.
2. May be compared to other ROIs both inside and outside the firm.

Understand the dynamics behind ROI to improve the ratio:
- Decrease assets.
- Increase revenues.
- Decrease costs.

Residual income (RI) = an accounting measure of income minus a dollar amount for
required return on an accounting measure of investment.
RI =icnome−( RRR x investment )
- RRR = required rate of return.

The benefits of buying summaries with Stuvia:

Guaranteed quality through customer reviews

Guaranteed quality through customer reviews

Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.

Quick and easy check-out

Quick and easy check-out

You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.

Focus on what matters

Focus on what matters

Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!

Frequently asked questions

What do I get when I buy this document?

You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.

Satisfaction guarantee: how does it work?

Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.

Who am I buying these notes from?

Stuvia is a marketplace, so you are not buying this document from us, but from seller isabelvanrees. Stuvia facilitates payment to the seller.

Will I be stuck with a subscription?

No, you only buy these notes for $8.09. You're not tied to anything after your purchase.

Can Stuvia be trusted?

4.6 stars on Google & Trustpilot (+1000 reviews)

56326 documents were sold in the last 30 days

Founded in 2010, the go-to place to buy study notes for 14 years now

Start selling
$8.09  7x  sold
  • (0)
Add to cart
Added