56) Managerial Financial Accounting Assignments AP12-7 Solution

56) Managerial Financial Accounting Assignments AP12-7 Solution

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AP12-7
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ROI and EVA [LO 6] 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 Residential Waste Waste Total assets $13,200,00 0 $68,700,000 Noninterest-bearing current liabilities 2,990,000 10,500,000 Net income 1,650,000 5,910,000 Interest expense 1,240,000 7,340,000 Required rate of return 14% 14% Tax rate 40% 40% Calculate ROI for both subsidiaries. (Round answers to 2 decimal places, e.g. 5.25%.) Hazardous Waste [no answer]% Residential Waste [no answer]% AP12-7
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Hazardous Residential Waste Waste Net income $1,650,000 $5,910,000 Plus interest 1,240,000 7,340,000 Less tax effect of interest 496,000 2,936,000 NOPAT $2,394,000 $10,314,000 Total assets $13,200,000 $68,700,000 Less noninterest-bearing current liabilities 2,990,000 10,500,000 Investment $10,210,000 $58,200,000
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Calculate EVA for both subsidiaries. Note that since no adjustments for “accounting distortions”
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Unformatted text preview: are being made, EVA is equivalent to residual income. Hazardous Waste $[no answer] Residential Waste $[no answer] AP12-7 NOPAT $2,394,000 $10,314,000 Less cost of capital × investment (0.14 × $10,210,000) 1,429,400 (0.14 × $58,200,000) 8,148,000 EVA $964,600 $2,166,000 Which subsidiary has added the most to shareholder value in the last year? Residential Waste AP12-7 As measured in terms of EVA, Residential Waste has created the most shareholder value. Based on the limited information, which subsidiary is the best candidate for expansion? Hazardous Waste Click here if you would like to Show Work for this question AP12-7 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....
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This note was uploaded on 08/02/2011 for the course MGMT 425 taught by Professor Brown/lexner during the Spring '11 term at Kaplan University.

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56) Managerial Financial Accounting Assignments AP12-7 Solution

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