Calculate return investment (ROI) for each division using operating income as a measure of income and total assets as a measure of investment. Calculate residual income (RI) for each division using operating income as a measure of income and total assets minus current liabilities as a measure of investment. William Abraham, 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. Performance Auto company, whose tax rate is 40%, has two sources of funds: long-terms debt with a market value of $18,000,000 at an interest rate of 10% and equity capital with a market value of $12,000,000 and a cost of equity of 15%. Applying the same weighted. average cost of capital |WACC| to each division, calculate EVA for each division. Use your preceding calculation to comment on the relative performance of each division. Capital budgeting. RI. Samantha Shiells, a new associate at Hansen Partners, has compiled the following data for a potential venture: Investment: $200,000 5-year useful life, with no salvage value Annual sales revenues = $100,000 Annual cash costs = $42,000 Hansen faces a 20% tax rate on income and knows that the tax authorities will only permit straight-line depreciation for tax purposes. Hansen imposes an after-tax required rate of return of 10%. Based on net present value considerations, is this a project Hansen Partners would want to take? Hansen Partners use straight-line depreciation for internal accounting and measure investment as the net book value of assets at the of the year. Calculate the residual income in each year if the project were adopted. Demonstrate that the conservation property of residual income, as described on page 883 hold in this example. Calculate return investment (ROI) for each division using operating income as a measure of income and total assets as a measure of investment. Calculate residual income (RI) for each division using operating income as a measure of income and total assets minus current liabilities as a measure of investment. William Abraham, 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. Performance Auto company, whose tax rate is 40%, has two sources of funds: long-terms debt with a market value of $18,000,000 at an interest rate of 10% and equity capital with a market value of $12,000,000 and a cost of equity of 15%. Applying the same weighted. average cost of capital |WACC| to each division, calculate EVA for each division. Use your preceding calculation to comment on the relative performance of each division. Capital budgeting. RI. Samantha Shiells, a new associate at Hansen Partners, has compiled the following data for a potential venture: Investment: $200,000 5-year useful life, with no salvage value Annual sales revenues = $100,000 Annual cash costs = $42,000 Hansen faces a 20% tax rate on income and knows that the tax authorities will only permit straight-line depreciation for tax purposes. Hansen imposes an after-tax required rate of return of 10%. Based on net present value considerations, is this a project Hansen Partners would want to take? Hansen Partners use straight-line depreciation for internal accounting and measure investment as the net book value of assets at the of the year. Calculate the residual income in each year if the project were adopted. Demonstrate that the conservation property of residual income, as described on page 883 hold in this example
