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ELN Waste Management has a subsidiary that disposes of hazardous waste and a subsidiary that collects and disposes of residential garbage. Information related to the
| ELN Waste Management has a subsidiary that disposes of hazardous waste and a subsidiary that collects and disposes of residential garbage. Information related to the two subsidiaries follows: | ||||||||
| Hazardous Waste | Residential Waste | |||||||
| Total assets | $15,300,000 | $87,000,000 | ||||||
| Noninterest bearing current liabilities | 3,300,000 | 13,200,000 | ||||||
| Net income | 1,870,000 | 6,600,000 | ||||||
| Interest expense | 1,375,000 | 8,030,000 | ||||||
| Required rate of return | 10% | 13% | ||||||
| Tax rate | 40% | 40% | ||||||
| Required | ||||||||
| a. Calculate ROI for both subsidiaries. | ||||||||
| Hazardous Waste | ||||||||
| NOPAT = | + [ | ( | )] = | |||||
| Invested capital = | = | |||||||
| ROI = | = | |||||||
| Residential Waste | ||||||||
| NOPAT = | + [ | ( | )] = | |||||
| Invested capital = | = | |||||||
| ROI = | = | |||||||
| b. Calculate EVA for both subsidiaries. Note that since no adjustments for "accounting distortions" are being made, EVA is equivalent to residual income. | ||||||||
| Residual income = | ||||||||
| Hazardous Waste | ||||||||
| ( | ) = | |||||||
| Residential Waste | ||||||||
| ( | ) = | |||||||
| c. Which subsidiary has added the most to shareholder value in the last year? | ||||||||
| d. Based on the limited information, which subsidiary is the best candidate for expansion? Explain. | ||||||||
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