The following data is available for the Canadian automotive manufacturer, Richardson's Auto Parts Inc. for the 2020 fiscal year:

Income before income taxes			$10,000,000
Income tax expense (40%)			4,000,000
Assets, Jan 1, 2010			80,000,000
Assets, Dec 31, 2010			90,000,000
Invested capital - book value			20,000,000
Invested capital - market value		60,000,000

The company believes in rewarding performance by declaring bonuses equal to 10% of income before taxes if the following criteria are met:

• ROI must exceed 11%; and
• RI must be positive using 12% as the minimum rate of return.

The minority shareholders are upset that the company has been declaring bonuses to its managers even though they feel that they are not receiving an adequate return on their investment. The company's weighted average cost of capital is 10%.

1. What is the ROI and residual income for the company. Show calculations. Based on your answer, would the managers receive a bonus for 2010?
2. What is the firm's EVA for fiscal 2010. Show calculations.
3. Ignoring your answer in Part 1, assume the company declares a 10% bonus to its managers. How would the bonus effect your EVA calculation from Part 2? Show calculations.

Answer rating: 100% (QA)

To calculate the ROI Return on Investment and residual income for Richardsons Auto Parts Inc we need ... View the full answer