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Service revenue Variable expenses Controllable fixed expenses Fixed expenses controllable by others Metro $1,000,000 200,000 400,000 230,000 Suburban $800,000 150,000 320,000 200,000 Outlying $400,000 100,000 150,000 90,000 In addition to the expenses listed above, the company has $95,000 of common fixed expenses. Income-tax expense for the year is $145,000. Required: 1. Prepare a segmented income statement for Countywide Cable Services, Inc. Use the contribution format. Segmented Income Statement Service revenue Variable expenses Controllable fixed expenses Fixed expenses controllable by segment Profit margin control by segment Fixed expenses controllable by others Profit margin traceable to segment Common Fixed Exp. IBT Income Tax Exp Net Income Countywide Segments Services Metro Suburban Outlying $2,200,000 $1,000,000 $800,000 $400,000 450,000 200,000 150,000 100,000 $1,750,000 $800,000 $650,000 $300,000 870,000 400,000 320,000 150,000 $880,000 $400,000 $330,000 $150,000 520,000 230,000 200,000 90,000 $360,000 $170,000 $130,000 $60,000 95000 $265,000 145000 $120,000 Required: Calculate Golden Gate Construction Associates' weighted-average cost of capital. WACC = WACC = (after tax cost of debt K)(mkt value of debt) + (cost of Eq K)(Mkt value of Eq) (Market value of debt + Market value of equity) (.06)($60,000,000)+(.15)($90,000,000) 60000000 + $90,000,000 = 0.114 Division Total Assets Real estate ### Construction 60,000,000 Current Liabilities $6,000,000 4,000,000 Before-Tax Operating Income $20,000,000 18,000,000 Required: Calculate the economic value added (EVA) for each of Golden Gate Construction Associates' divisions. (You will need to use the weighted-average cost of capital, which was computed in the preceding exercise.) Economic Value Added = Divisions = Real Estate Construction = = Investment Center's AfterTax Operating After-tax Operating Income (in Millions) $20(1-.40) $18(1-.40) - - Investment Investment Center's Center's X Total Current Assets Liabilities Current Total assets - Liabilities X (in Millions) (in Millions) $100 $6 X $60 $4 X WeightedAverage Cost of Capital WACC 0.114 0.114 Economic Value Added = (in Millions) = $1.284 = $4.416 FAIRMONT DIVISION Income Statement For the Year Ended December 31, 20x1 Sales revenue Cost of goods sold Gross margin Operating expenses: Administrative Selling Income from operations before income taxes $24,000 15,800 $8,200 $2,140 3,600 $5,740 $2,460 Required: 1. Calculate the following performance measures for 20x1 for the Fairmont Division. a. Return on investment (ROI). b. Residual income. 2. Would the management of Fairmont Division have been more likely to accept the investment opportunity it had in 20x1 if residual income were used as a performance measure instead of ROI? Explain your answer. Investment in Assets Balance on 12/31 Balance on 1/01 Beginning + Ending Balance Average Balance a. ROI Income from Operations b4 tax Inputed Interest charge Average Productive Assets $12,600,000 $12,000,000.00 $24,600,000.00 $12,300,000 $0.20 2460000 $12,300,000 Inputed Interest rate Inputed Interest chrg b. Residual Income 0.15 $1,845,000 $615,000 2 Yes, Fairmont's management almost certainly would have agree to take the financing if residual Income was employed. The Investment prospect would have decreased Fairmont's 20x1 ROI, for the reason that the projects anticipated return 18% was lesser than the division's past returns in addition to its actual 20x1 ROI. Management may perhaps have prohibited the investment since bonuses are constructed in part on the ROI performance calculation. If residual revenue were utilized as a performance calculation, management would take on all investment that would multiply residual revenue including the investment opportunity it had in 20x1. WHB ACC 650 Module 6 11302016 Name: 12-33 13-27 13-28 13-29 Identifying the correct Proper Proper format Well written amounts Calculations for numbers reponse 10.00 16.00 2.00 6.00 2.00 6.00 1.00 3.00 4.00 Score test test test test Total 26.00 8.00 8.00 8.00 - Format Legend Entry Points Checksums Feedback Score Corrected entry 50.00 12-33 Amt 10.00 Calc Format 16.00 Resp Total - 26.00 - Countywide Cable Services, Inc. is organized with three segments: Metro, Suburban, and Outlying. Data fo Service Revenue Variable Expenses Controllable Fixed Expenses Fixed Expenses controllable by others $ $ $ $ Metro 1,000,000 200,000 400,000 230,000 Common Fixed Expenses Income Tax Expense $ $ 95,000 145,000 Required: Prepare a segmented income statement for Countywide Cable Services, Inc. Use the contribution fo Segmen Countrywide Cable Sales Revenue Variable Expenses Segment Contribution Margin Less: Controllable Fixed Exp Controllable Profit Margin Less: Traced to Unit, Controlled by others Segment Profit Margin Less: Common Fixed Expenses Income before taxes Less: Income taxes Net income $ $ $ $ $ $ $ Metro 1,000,000 200,000 800,000 400,000 400,000 230,000 170,000 n, and Outlying. Data for these segments for the year just ended follow. $ $ $ $ Suburban 800,000 150,000 320,000 200,000 $ $ $ $ Outlying 400,000 100,000 150,000 90,000 Willard H Berry 9/28/2016 Use the contribution format. $ $ $ $ $ $ $ Segment Suburban 800,000 150,000 650,000 320,000 330,000 200,000 130,000 $ $ $ $ $ $ $ Outlying 400,000 100,000 300,000 150,000 150,000 90,000 60,000 13-27 Amt 2.00 Calc 6.00 Format Resp - Total - 8.00 - Golden Gate Construction Associates, a real estate developer and building contractor in San Francisco equity. The cost to Golden Gate of issuing debt is the after-tax cost of the interest payments on the deb payments are tax deductible. The cost of Golden Gate's equity capital is the investment opportunity rate could earn on investments of similar risk to that of investing in Golden Gate Construction Associates. Th long-term debt is 10 percent, and the company's tax rate is 40 percent. The cost of Golden Gate's equit value (and book value) of Golden Gate's equity is $90 million. Debt Debt-Rate Equity Equity-Rate Tax Rate $ $ 60,000,000 10% 90,000,000 15% 40% Required: Calculate Golden Gate Construction Associates' weighted-average cost of capital. WACC 13-28 Amt 2.00 Calc 6.00 Format Resp - Total - 8.00 - The company has two divisions: the real estate division and the construction division. The divisions' tota operating income for the most recent year are as follows: Total Assets Real Estate Construction Current Liabilities $ 100,000,000 $ 6,000,000 $ 60,000,000 $ 4,000,000 Before-Tax Operating Income $ 20,000,000 $ 18,000,000 Required: Calculate the economic value added (EVA) for each of Golden Gate Construction Associates' div average cost of capital, which was computed in the preceding exercise.) Real Estate Construction Net Capital WACC Needed Return $ 0.00% - $ After Tax Income Less: Needed Return EVA $ $ - $ $ 0.00% - - ntractor in San Francisco, has two sources of long-term capital: debt and est payments on the debt, taking into account the fact that the interest vestment opportunity rate of Golden Gate's investors, that is, the rate they onstruction Associates. The interest rate on Golden Gate's $60 million of st of Golden Gate's equity capital is 15 percent. Moreover, the market of capital. ivision. The divisions' total assets, current liabilities, and before-tax truction Associates' divisions. (You will need to use the weighted- 13-29 Amt 1.00 Calc Format 3.00 - Resp Total 4.00 8.00 - Wyalusing Industries has manufactured prefabricated houses for over 20 years. The houses are constr customers' lots. Wyalusing expanded into the precut housing market when it acquired Fairmont Compa types of lumber are precut into the appropriate lengths, banded into packages, and shipped to custome the Fairmont Division as an investment center. Wyalusing uses return on investment (ROI) as a perform average productive assets. Management bonuses are based in part on ROI. All investments are expect before income taxes. Fairmont's ROI has ranged from 19.3 to 22.1 percent since it was acquired. Fairm that had an estimated ROI of 18 percent. Fairmont's management decided against the investment beca the division's overall ROI. The 20x1 income statement for Fairmont Division follows. The division's prod 20x1, a 5 percent increase over the balance at the beginning of the year. FAIRMONT DIVISION Income Statement For the Year Ended December 31, 20x1 (in thousands) Sales Revenue Cost of Goods Sold Gross Margin Operating Expenses Administrative Selling Income before Income taxes Required Rate of Return Productive Assets at the End of the Year Growth during year 15% $ 12,600,000 5% Required: Calculate the following performance measures for 20x1 for the Fairmont Division. a. Return on investment (ROI). Productive Assets at the Start of the Year Productive Assets at the End of the Year Average Productive Assets ROI $ 12,600,000 $ 6,300,000 b. Residual income. Average Productive Assets Required Rate of Return Required Return $ 6,300,000 Residual Income Would the management of Fairmont Division have been more likely to accept the invest residual income were used as a performance measure instead of ROI? Explain your ans . The houses are constructed in sections to be assembled on quired Fairmont Company, one of its suppliers. In this market, various and shipped to customers' lots for assembly. Wyalusing designated ment (ROI) as a performance measure with investment defined as investments are expected to earn a minimum return of 15 percent ce it was acquired. Fairmont had an investment opportunity in 20x1 inst the investment because it believed the investment would decrease ows. The division's productive assets were $12,600,000 at the end of VISION ment ember 31, 20x1 ds) airmont Division. $ $ $ 24,000 15,800 8,200 $ $ 5,740 2,460 $ 2,140 $ 3,600 ly to accept the investment opportunity it had in 20x1 if ROI? Explain your