Class Notes (1,000,000)
CA (610,000)
UBC (10,000)
COMM (700)
Lecture 22

COMM 294 Lecture Notes - Lecture 22: Earnings Before Interest And Taxes, Profit Center, Opportunity Cost


Department
Commerce
Course Code
COMM 294
Professor
Bill Dorfman
Lecture
22

Page:
of 12
Reporting*for*Control*(Chapter*11):*ROI*and*RI!
Prepared by W.Dorfmann 2015 © Week #11 ROI & RI
"#$$%$!
Control??*–*Evaluation*using*accounting*measures*
!
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Hurdle*Rates*
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We*consider*two*different*accounting*measures:*
1.**Return*on*Investment*(ROI)**=*
INCOME*
INVESTED*CAPITAL*
!
2.**Residual*Income**=*
INCOME**–**
A!
INVESTED*
CAPITAL*
x*
B!
!
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!*
Decision influencing
Decision facilitating
aligning the goals of individuals and the organization
getting all workers to work in the same direction
facilitating feedback
decision influencing
how high that measure should be...
Policy / Rule
e.g. Sauder set passing grade of 60. 60 is a hurdle rate.
Capital "Charge"
need to make sure what these terms mean
e.g. Net operating income after taxes = $ * (1-tax rate)
Reporting*for*Control*(Chapter*11):*ROI*and*RI!
Prepared by W.Dorfmann 2015 © Week #11 ROI & RI
"#$$%T!
For*Responsibility*Centres*(Profit*Centres*&*Investment*Centres)*
!
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Cost*of*Capital:*
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e.g. McDonalds has lots of real estate assets. (not productive assets)
not a big deal
avoid different calculation in depreciation
assets bigger
Residual Income = Income - (Assets * Cost of Capital)
look up for other invest opportunities
to make a compare
Policy
Return*on*Investment*
Prepared by W.Dorfmann 2015 © Week #11 ROI & RI
"#$$%^!
*
Return*on*Investment*(ROI)**=*
INCOME*
INVESTED*CAPITAL*
*
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DECISION:*As*long*as*ROI*>*target*(hurdle*rate),*then*it*is*a*good*thing!*
If*you*are*a*manager,*how*do*you*improve*ROI??*
*
Return*on*Investment*(ROI)**=*
INCOME*
INVESTED*CAPITAL*
*
********=*
INCOME*
x*
SALES*
INVESTED*CAPITAL*
SALES*
*
*
********=*
INCOME*
x*
SALES*
SALES*
INVESTED*CAPITAL*
*
****ROI******=*
______________*
x*
_________________*
Sales*Margin!_!`!'9!2);12!(';;)32!310).,.,/!)2!43'9.-!)9-13!1V41,212!*'8131(!
!
Capital*Turnover!_!a!K);12!(';;)32!/1,13)-1(!P>!1813>!(';;)3!'9!.,812-1(!*)4.-);!
There*are*three*ways*to*increase*ROI*.*.*.*
!
1. Reduce*operating*expenses*
E043'812!2);12!0)3/.,!
!
2. Increase*sales*
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!
3. Reduce*invested*capital*(operating*assets)*
E,*31)212!*)4.-);!-+3,'813*!
e.g. investing $100, return is 10%. investing 1m, return
is 10%. which one is better based on ROI? Same.
RULE
Sales Margin
Capital Turnover
how much income in
generated for 1 dollar of sale