BUS 5431 Week 8 Home Work - PROBLEM 12-3 Return on Investment[LO 2 Consider the following information for McKinley and Son Total assets

BUS 5431 Week 8 Home Work - PROBLEM 12-3 Return on...

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PROBLEM 12-3. Return on Investment [LO 2] Consider the following information for McKinley and Son: 12/31/2017 12/31/2018 Total assets 55,000,000 62,000,000 Noninterest-bearing current liabilities 1,100,000 1,320,000 Net income 3,300,000 3,426,000 Interest Expense 726,000 770,000 Tax rate 35% 35% a. Evaluate the company in terms of ROI. Amount in $ 2017 Amount in $ 2018 Net Income 3,300,000 3,426,000 + Tax 35% 1,776,923 1,844,769 Income before tax 5,076,923 5,720,769 +Interest 726,000 770,000 5,802,923 6,040,769 Less: Tax 35% 2,032,023 2,114,269 NOPAT 3,771,900 3,926,500 Investment capital: Amount in $ 2017 Amount in $ 2018 Assets 55,000,000 62,000,000 Less: Liability 1,100,000 1,320,000 Invested capital 53,900,000 60,680,000 2017 NOPAT/Invested Capital = 3,771,900/53,900,000 = 0.06997 or 7% 2018 NOPAT/Invested Capital = 3,926,500/60,680,000 = 0.06471 or 6.47% b. While income has increased in fiscal 2018, is it clear that the company’s performance has improved? The income and the capital investment of the company has increased but the ROI has decreased. It shows that the company is not earning the return it was earning in 2017. PROBLEM 12-7. ROI and EVA [LO 2, 3] ELN Waste Management has a subsidiary that disposes of hazardous waste and a subsidiary that collects and disposes of residential garbage. Information related to the two subsidiaries follows: Hazardous Waste Residential Waste
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Total assets 15,300,000 87,000,000 Noninterest- bearing current liabilities 3,300,000 13,200,000 Net Income 1,870,000 6,600,000 Interest Expense 1,375,000 8,030,000 Required rate of return 10% 13% Tax rate 40% 40% Required a. Calculate ROI for both subsidiaries. Amount in $ Hazardous Waste Amount in $ Residential Waste Net Income 1,870,000 6,600,000 +Tax 40% 1,246,667 5,500,000 Income before tax 3,116,667 1,100,000 Interest 1,357,000 8,030,000 4,491,667 9,130,000 Less: Tax 40% 1,796,667 3,652,000 NOPAT 2,695,000 5,478,000 Investment capital Amount in $ Hazardous Waste Amount in $ Residential Waste Assets 15,300,000 87,000,000 Less: Liability 3,300,000 13,200,000 Invested capital 12,000,000 73,800,000 NOPAT/Invested capital Hazardous Waste = 2,695,000*100=12,000,000 or ~22.5% Residential waste = 5,478,000*100=73,800,000 or ~7.47% b. Calculate EVA for both subsidiaries. Note that since no adjustments for accounting distortions are being made, EVA is equivalent to residual income. Residential Income = NOPAT – [(cost of capital)(assets-non-interest bearing)] 2,695,000-[(.1)(15,300,000-3,300,000)] 2,695,000 – 1,200,000 1,495,000 for Hazardous waste 11,418,000-[(.13)(87,000,000-13,200,000)] 11,418,000 – 9,594,000 1,824,000 for Residential waste c. Which subsidiary has added the most to shareholder value in the last year? Hazardous waste subsidiary has a higher residual income resulting in a greater value to shareholders
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d. Based on the limited information, which subsidiary is the best candidate for expansion? Explain. Based on the information we have its recommended to expand hazardous waste subsidiary because its return is the highest and the economic value added is positive as well. PROBLEM 12-10. Economic Value Added and the Balanced Scorecard [LO 2, 3] The Spectrum Book Company has two divisions: The Brick and Mortar division sells books through more than 100 bookstores throughout the United States; the Internet division was formed 18 months ago and sells books via the Internet. Data for the past year are: Brick and Mortar Division Internet Division Total assets 162,000,000 15,480,000 Noninterest- bearing current liabilities 7,020,000 2,520,000 Interest Expense 1,260,000 418,500 Net Income (loss) 27,810,000 (1,125,000) Tax rate 40% -0- Cost of capital 10% 12% Required a. Evaluate the two divisions in terms of economic value added (EVA).
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