Homework answers - attract suppliers of funds and to reward...

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1. The return that is achieved in any one period on the invested capital of a company consists of the returns (and losses) realized by its various segments and divisions. In turn, these returns are made up of the results achieved by individual product lines and projects. A wellmanaged company exercises rigorous control over the returns achieved by each of its profit centers, and it rewards the managers on the basis of such results. Specifically, when evaluating new investments in assets or projects, management will compute the estimated returns it expects to achieve and use these estimates as a basis for its decision to invest or not. 2. Profit generation is the first and foremost purpose of a company. The effectiveness of operating performance determines the ability of the company to survive financially, to
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Unformatted text preview: attract suppliers of funds, and to reward them adequately. Return on invested capital is the prime measure of company performance. The analyst uses it as an indicator of managerial effectiveness, and/or a measure of the company's ability to earn a satisfactory return on investment. 3. If the investment base is defined as comprising net operating assets, then net operating profit (e.g., before interest) after tax (NOPAT) is the relevant income figure to use. The exclusion of interest from income deductions is due to its being regarded as a payment for the use of money from the suppliers of debt capital (in the same way that dividends are regarded as a payment to suppliers of equity capital). NOPAT is the appropriate amount to measure against net operating assets as both are considered to be operating....
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