Financial Performance Measures Chapter 8 Managerial Accounting Concepts and Empirical Evidence

Jess Co. Comparison of Profit Centers

AP = Accounting Profits (income) I = Accounting Value of Investments (assets)

AP in above needs to be thought of as NI SE = Stockholders’ Equity ROE (Return on Equity) = AP/SE = [(AP/TR) * (TR/I)] [I/SE ] = (ROI). (I/SE)

CF 0 =initial cost of Investment CF t = net cash flow in period t n = economic life of capital project IRR = internal rate of return

AP = accounting profits I = accounting value of investment k = cost of capital

Jess Co. Comparison of Controllable Profits ROI and RI Based on controllable investment levels of $3,500,00 and $ 5,000,000 in SU 1 and SU 2 respectively Based on controllable investment levels noted before and a capital charge equal to 15% of the subunit investment level

CF A = annual cash flows from operations GI = gross fixed investments

R i,t = stock return for firm i in period t  i = beta (i.e, measure of risk) for firm i R m,t = market return in period t R f,t = risk-free return in period t  i,t = error term for firm i in period t

RC = replacement cost of firm’s tangible assets MV = total market value of a firm (including stock and debt)

BK = accounting book value of a firm