Example $2$a: Financial Statement Information Regarding Division X

Income Statement

Revenues $$147,500$

$-$Operating Expenses $100,000$

Operating Income $$47,500$

$-$Interest Exp $2,000$

Earning before tax $$45,500$

$-$Income Taxes $(35\%)15,925$

Net Income $$29,575$

Partial Balance Sheet

Current Assets $$25,000$ Current Liabilities $$15,000$

Long Term Assets $200,000$ LT Liabilities $100,000$

Footnote Info:

Long Term Assets consist of PPE with historical cost of $$400,000$ and a useful life averaging $20$ years $(0$ salvage value, straight line depreciation, average age is $10$ years$).$

Other Info:

a$.$ In calculating ROI and RI$,$ the firm defines $$income$$ as operating income and defines $$investments$$ as total assets at net book value.

b$.$ The firm uses a required rate of return for division X of $8\%.$

c$.$ The construction index is now $208,10$ years ago it was $110.$ Note: The construction index indicates how the cost of construction has changed over period that the divisions have been operating

d$.$ The firm$$s market value of debt is $$5,000,000.$

The firm$$s before tax effective interest rate on debt is $9\%.$

The firm$$s market value of equity is $$10,000,000.$

The firm$$s cost of equity capital is $10\%.$

Calculate ROI, RI$,$ EVA for Division X$.$

Example $2$b:

Assume division Z is a new division with ROI of $5\%.$ Is X $(21\%)$ better than Z $(5\%)?$ Complete a current cost restatement or order to compare the divisions.

Recall from the earlier information:

Historical cost $=$ $$400,000$; income $=$ $$47,500$

$10$ years old; $20$ year life

SL Depreciation $=(400,0000)/20=$ $$20,000$ per year

NBV $=$ $$400,00010*20,000=$ $$200,000$

Construction index $=208,10$ years ago $=110.$

Example $2$c$.$ Division Y is located in Canada.

It had operating income in $20$X$9$ of $$100,000$ Canadian. It had total assets $($GBV$)$ at the end of $20$X$9$ of $$1,000,000$ Canadian.

The Division was founded in $19$X$9$ when one US dollar would buy $$1\mathrm{.}25$ Canadian dollars. The average exchange rate during $20$X$9$ was one US dollar $=$ $$1\mathrm{.}60$ Canadian $($$$1\mathrm{.}55$ on Jan. $1$ and $$1\mathrm{.}65$ on Dec. $31).$ This firm measures ROI using operating income and total assets at GBV$.$

Compile a foreign currency restatement.

Example $2$d$.$ Assets purchased at different times

Assume instead of the above that $$400,000$ of the assets were purchased in $19$X$?9,$ $$500,000$ in $20$X$2,$ and $$100,000$ are current assets. The exchange rate in $20$X$2$ was $$1$ US $=$ $$1\mathrm{.}36$ canadian.

Compile a foreign currency restatement.