Comfy Ltd manufactures furniture in several divisions, including the Home Division and the Outdoor Division. The companys required rate of return is 8%. Some divisional financial measures for the current quarter are as follows:

	Home Division	Outdoor Division
Total assets	$ 1,650,000	$ 1,425,000
Current liabilities	$ 330,000	$ 420,000
Operating profit	$ 124,000	$ 128,000

Required:

(a) Calculate the return on investment (ROI) for each division using total assets as a measure of invested capital. (1 mark)

(b) Calculate the residual income (RI) for each division using total assets minus current liabilities as a measure of invested capital. (2 marks)

(c) The Home Division manager argues that the Outdoor Division has loaded up 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 divisions. Comment on the result. (3 marks)

(d) Comfy Ltd has two sources of funds: long-term debt with a market value of $400,000 at an after-tax interest rate of 6%, and equity capital with a market value of $600,000 and a cost of equity of 11%. The company tax rate is 30%. Calculate the economic valued added (EVA) for each division. (3 marks)

(e) Are the measures above consistent in comparing the performance of the two divisions? (1 mark)