- 10 Marks
FM – Nov 2017 – L2 – Q3a – Portfolio theory and the capital asset pricing model (CAPM)
Explain the advantages of using ROI to measure performance and the problems associated with it.
Question
Wax Ltd is a very large company employing over 20,000 people. Its business covers ten activities including food processing, warehousing, clearing, and forwarding. Each activity is run as a division. Performance and hence the rewarding of management is based on divisional Returns on Investment (ROI).
Required:
i) Explain FOUR advantages that may accrue to Wax Ltd for using ROI to measure performance. (4 marks)
ii) Explain THREE problems under the use of ROI and what safeguards can be applied to minimize such problems. (6 marks)
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