Aurora Borealis Paints is a national paint manufacturer and retailer. The company is segmented into five divisions:
Question:
Assume that management has specified a 23% target rate of return. Further assume that the companys weighted average cost of capital is 14% and its effective tax rate is 32%.
Requirements
Round all calculations to four decimal places.
1. Calculate each divisions ROI.
2. Calculate each divisions profit margin. Interpret your results.
3. Calculated each divisions asset turnover. Interpret your results.
4. Use the expanded ROI formula to confirm your results from Requirement 1. Interpret your results.
5. Calculate each divisions RI. Interpret your results and offer recommendations for any division with negative RI.
6. Calculate each divisions EVA. Interpret your results.
7. Describe the conceptual and computational similarities and differences between RI and EVA.
8. Total asset data was provided in this problem. If you were to gather this information from an annual report, how would you measure total assets? Describe your measurement choices and some of the pros and cons of those choices.
9. Describe some of the factors that management considers when setting its minimum target rate of return.
10. Explain why some firms prefer to use RI rather than ROI for performance measurement.
11. Explain why budget versus actual performance reports are insufficient for evaluating the performance of investment centres.
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...
Step by Step Answer:
Managerial Accounting
ISBN: 978-0176223311
1st Canadian Edition
Authors: Karen Wilken Braun, Wendy Tietz, Walter Harrison, Rhonda Pyp