Margin 3100003450000 899 turnover 34500002200000

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Unformatted text preview: rgin: $310,000/$3,450,000 = 8.99% Turnover: $3,450,000/$2,200,000 = 1.57 10–24 1. ROI Margin Turnover 2. Year 1 8.00% 12.00% 0.67 Year 2 6.97% 11.00% 0.63 Year 3 6.30% 10.50% 0.60 ROI: $1,200,000/$15,000,000 = 8% Margin: $1,200,000/$10,000,000 = 12% Turnover: $10,000,000/$15,000,000 = 0.67 The ROI increased because expenses decreased and assets turned over at a higher rate (sales increased). 337 3. Operating assets: $15,000,000 × 80% = $12,000,000 ROI: $945,000/$12,000,000 = 7.88% Margin: $945,000/$9,000,000 = 10.5% Turnover: $9,000,000/$12,000,000 = 0.75 The ROI increased because assets decreased. 4. ROI: $1,200,000/$12,000,000 = 10% Margin: $1,200,000/$10,000,000 = 12% Turnover: $10,000,000/$12,000,000 = 0.83 The ROI increased because expenses decreased and assets turned over at a higher rate (sales increased and the amount of assets decreased). Both margin and turnover increased. 10–25 1. After-tax cost of mortgage bonds = (1 – 0.4)(0.06) = 0.036 Cost of common stock = 0.08 + 0.03 = 0.11 Dollar Amount Percent Mortgage bonds $ 3,000,000 0.25 Common stock 9,000,000 0.75 Total $ 12,000,000 After-Tax × Cost = 0.036 0.110 Weighted average cost of capital Weighted Cost 0.0090 0.0825 0.0915 Cost of capital = $4,000,000 × 0.0915 = $366,000 2. After-tax operating income Less: Cost of capital EVA $ 350,000 366,000 $( 16,000) EVA is negative; Donegal is destroying wealth. 3. After-tax cost of new bonds = (1 – 0.4)(0.09) = 0.054 Dollar After-Tax Amount Percent × Cost = Unsecured bonds $ 2,000,000 0.143 0.054 Mortgage bonds 3,000,000 0.214 0.036 0.643 0.110 Common stock 9,000,000 Total $ 14,000,000 Weighted average cost of capital Weighted Cost 0.0077 0.0077 0.0707 0.0861 Cost of capital = $5,000,000 × 0.0861 = $430,500 338 4. After-tax operating income Less: Cost of capital EVA $430,000 430,500 ($ 500) No, this is not a good idea. EVA is negative and Donegal is destroying wealth. 10–26 1. Minimum: $26 Maximum: $31 2. ($26 + $31)/2 = $28.50. Thus, the transfer price would be expressed as full cost plus 42.5% ($20...
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