A Plus Auto Company operates a New Car Division (that sells high performance sports cars) and a Parts Division (that sells performance improvement parts for family cars). Some division financial measures for 2018 are as follows: (Click the icon to view the data.) Required - X Data Table . . . . . Requirement 1. Calculate ROI for each division using operating income as a measure of income and total assets as a m format X.X%.) New Car Performance Measure of income Measure of investment x 100 = ROI Division Parts Division New Car Division 2600000 40000000 x 100 = 6.5 % Total assets EA 40,000,000 $ 31,562,500 Performance Parts Division 2525000 31562500 x 100 = 8 % Current liabilities EA 6,700,000 $ 8,000,000 Operating income EA Requirement 2. Calculate RI for each division using operating income as a measure of income and total assets minus cu 2,600,000 $ 2,525,000 residual losses.) Required rate of return 12% 12% Measure of income Imputed cost of investment RI New Car Division 2600000 39196000 (36596000) Performance Parts Division 2525000 30602500 (28077500) Print Done Requirement 3. William Abraham, the New Car Division manager, argues that the Performance Parts Division has "loadeRequirement 3. WilliamAbraham, the New Car Division manager, argues that the Performance Parts Division has "loaded up on a lot of short-term debt" to boost its RI. Calculate an alternative RI for each division that is not sensitive to the amount of short-term debt taken on by the Performance Parts Division. Comment on the result. (Use parentheses or a minus sign to enter residual losses.) Measure of income . Imputed cost of investment = RI New Car Division 2600000 . 4800000 = (2200000) Performance Parts Division 2525000 . 3737500 = (1252500) With this new measure that is insensitive to the level of short-term debt, the V has a relatively worse RI than the Division. negative, indicating that V earning the 12% required rate of return on their assets. Requirement 4. A Plus Auto Company, whose tax rate is 30%, has two sources of funds: long-tenn debt with a market value of $15,000,000 at an interest rate of 10% and equity capital with a market value of $11,000,000 and a cost of equity of 15%. Applying the same weightedaverage cost of capital (WACC) to each division, calculate EVA for each division. Begin by determining the formula to calculate WACC. ( Market value of equity x Cost of equity ) + ( After-tax cost of debt x Market value of debt ) = WACC Cost of equity + After-tax cost of debt The company's WACC is :]. (Enter the amount as a decimal. Round the WACC to ve decimal places in the format X.XXXXX.) Determine the formula to calculate the EVA of each Division. Then enter the amounts for the New Car Division and the Performance Parts Division and calculate the EVA for each. (Enter the WACC to ve decimal :rlaoes in the format X.XXXXX. Round your intermediate wlculations to the nearest whole number. Use parentheses or a minus sign when entering a negative EVA.) After-tax operating inc. _ ( WACC x ( Total assets _ Current liabilities )) : EVA New Car Division: 2600000 _ ( x ( _ )) = Performance Parts Division: 2525000 . ( x ( _ l) = Requirement 5. Use your preceding calculations to comment on the relative performance of each division. Both the residual income and the EVA calculations indicate that the v Division is performing nominally better than the other Division. The Division has a higher residual income. The EVA for V indicates that, on an after-tax basis, the division(s) is (are) value
