Question
(a) Calculate the weighted average cost of capital (WACC) of Dave Ltd (round to the nearest whole number).. (b) Compute the following performance measures of
(a) Calculate the weighted average cost of capital (WACC) of Dave Ltd (round to the nearest whole number)..
(b) Compute the following performance measures of each division, based on profit after tax and total assets less current liabilities as the measure of investment.
(i) Return on investment (round one decimal place).
(ii) Residual income (round to nearest whole number).
(c) The CFO of Dave Ltd recommended that the Economic Value Added (EVA) is a better and fairer performance measure of the divisional performances, as there were research and development costs and restructuring expenses that will benefit the divisions over the next three years. There were no prior research and development costs and restructuring expenses in previous years.
Calculate the Economic Value Added of each division (round to nearest whole number).
(d) Based on your answers in (b) and (c), critically evaluate the results and determine which of the division managers will be rewarded with the special bonus if the performance of the division managers is evaluated based solely on each of the following performance measure:
(i) Return on investment.
(ii) Residual income.
(iii) Economic Value Added.
(e) Recommend any two (2) non-financial performance measures that may be used to evaluate and reward the divisional managers and explain why they are suitable.
Dave Ltd operates two manufacturing divisions, Salo Division and Deli Division. Dave Ltd's sources of financing are: Long term debt of \$20 million at an interest rate of 12% and market value of equity capital of $50 million at a cost of equity of 17%. The following are the data for the financial year ended 30 June 2023: The company's tax rate is 17%. The current company's policy is to reward the best division with a special bonusStep by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started