The following scenario relates to questions11 to 15.The following information relates to a
The following scenario relates to questions 11 to 15.
The following information relates to an investment project which is being evaluated by the directors of Fence Co, a listed company. The initial investment, payable at the start of the first year of operation, is $3·9 million.
The directors believe that this investment project will increase shareholder wealth if it achieves a return on capital employed greater than 15%. As a matter of policy, the directors require all investment projects to be evaluated using both the payback and return on capital employed methods. Shareholders have recently criticised the directors for using these investment appraisal methods, claiming that Fence Co ought to be using the academically-preferred net present value method.
The directors have a remuneration package which includes a financial reward for achieving an annual return on capital employed greater than 15%. The remuneration package does not include a share option scheme.
What is the payback period of the investment project？
A.2·75 years
B.1·50 years
C.2·65 years
D.1·55 years
Which of the following statements about investment appraisal methods is correct？A.The return on capital employed method considers the time value of money
B.Return on capital employed must be greater than the cost of equity if a project is to be accepted
C.Riskier projects should be evaluated with longer payback periods
D.Payback period ignores the timing of cash flows within the payback period
Which of the following statements about Fence Co is/are correct？
(1) Managerial reward schemes of listed companies should encourage the achievement of stakeholder objectives
(2) Requiring investment projects to be evaluated with return on capital employed is an example of dysfunctional behaviour encouraged by performance-related pay
(3) Fence Co has an agency problem as the directors are not acting to maximise the wealth of shareholders
A.1 and 2 only
B.1 only
C.2 and 3 only
D.1, 2 and 3
Which of the following statements about Fence Co directors’ remuneration package is/are correct？
(1) Directors’ remuneration should be determined by senior executive directors
(2) Introducing a share option scheme would help bring directors’ objectives in line with shareholders’ objectives
(3) Linking financial rewards to a target return on capital employed will encourage short-term profitability and discourage capital investment
A.2 only
B.1 and 3 only
C.2 and 3 only
D.1, 2 and 3
Based on the average investment method, what is the return on capital employed of the investment project？
A.13·3%
B.26·0%
C.52·0%
D.73·5%
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