DB Week 8, Schultz

DB Week 8, Schultz - 04/27/2011 BUS5431 Managerial...

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04/27/2011 BUS5431 Managerial Accounting Week 8 Homework Chapter 12 Problem 3 a. 12 /31/2011 12/31/2012 Net income $3,000,000 $3,115,000 Plus interest 660,000 700,000 Less tax effect of interest 231,000 245,000 NOPAT $3,891,000 $4,060,000 Total assets $50,000,000 $56,200,000 Less noninterest-bearing current liabilities 1,000,000 1,200,000 Investment $49,000,000 $55,000,000 ROI 7.94% 7.38% b. While income has increased, ROI has decreased. Thus, it is far from clear that company performance has improved. Problem 7 a. Hazardous Residential Waste Waste Net income $1,700,000 $6,000,000 Plus interest 1,250,000 7,300,000 Less tax effect of interest 500,000 2,920,000 NOPAT $2,450,000 $10,380,000 Total assets $13,000,000 $70,000,000 Less noninterest-bearing current liabilities 3,000,000 12,000,000 Investment $10,000,000 $58,000,000 ROI (NOPAT ÷ Investment) 24.50% 17.90% b. NOPAT $2,450,000 $10,380,000 Less cost of capital × investment (.12 × $10,000,000) 1,200,000 (.14 × $58,000,000) 8,120,000 EVA $1,250,000 $2,260,000 c. As measured in terms of EVA, Residential Waste has created the most shareholder value.
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d. Based on the limited information, Hazardous Waste is the best candidate for expansion. Its current ROI is quite high suggesting it may be able to earn a higher rate of return on additional assets compared to Residential Waste. Problem 10 a. Brick and Mortar Internet Division Division Net income (loss) $30,900,000 ($1,250,000) Plus interest 1,400,000 465,000 Less tax effect of interest 560,000 0 NOPAT $31,740,000 ($ 785,000 ) Total assets $180,000,000 $17,200,000 Less noninterest-bearing current liabilities 7,800,000 2,800,000 Investment $172,200,000 $14,400,000 NOPAT $31,740,000 ($ 785,000) Less cost of capital × investment (.13 × $172,200,000) 22,386,000 (.15 × $14,400,000) 2,160,000 EVA $ 9,354,000 ($2,945,000 ) b. In its early years, the Internet Division needs to make substantial investments in infrastructure and prices may be set at a low level to build a customer base. Thus, it is not surprising that EVA is negative. Managers of the Internet Division could take actions that are in the long-run interest of the company and still reduce EVA. Since current period EVA does not capture what the managers of the Internet division are doing to create future value, it might be better to turn to a balanced scorecard to measure what the division is doing in terms of its customers, internal processes, and innovation to create future value. c.
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DB Week 8, Schultz - 04/27/2011 BUS5431 Managerial...

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