Question
In late 2016, Jennifer Parker was promoted to manager of the TG division of United Connections, Inc. Jennifer was one of the first employees United
In late 2016, Jennifer Parker was promoted to manager of the TG division of United Connections, Inc. Jennifer was one of the first employees United Connections hired when it started the TG division in 2008, as part of the broader corporate strategy to expand its suite of corporate networking solutions. TG's primary business is collecting, compiling, and selling contact information of executives, including information about their social networks. Given its business model, the division's costs are mostly related to selling, general, and administrative, in addition to some research and development.
At the beginning of 2019, Jennifer faced her first major performance review since taking control of the division. To this end, United Connections' CFO prepared condensed financial information for the TG division for years 2015-2018, as summarized below.
1. Recalculate the financial information tabulated in below, assuming that, for performance evaluation purposes at United Connections, R&D expenditures should be capitalized rather than expensed. Assume that R&D expenditures provide equal benefits over three years, beginning (that is, including) the year they are purchased and capitalized. Also assume that R&D expense for the division was 933 thousand in 2014, 621 thousand in 2013, and zero prior.
2. Describe Jennifer's performance in 2017 and 2018 based on each of the following:
- Adjusted operating income (i.e., operating income, adjusted for R&D being capitalized and amortized over three years, as in 1.)
- EVA, using ending period values for debt, adjusted capital employed (i.e., adjusted net operating assets), and the respective annual WACC rate.
- Return on investment (ROI), where ROI equals adjusted operating income / ending adjusted net operating assets.
Do the three metrics provide similar conclusions? Explain whether you see any "red flags" with regards to the TG division given the metrics and differences among them.
3. Most EVA proponents argue that the capital employed component of EVA should be based on the market value of assets (i.e., sum of the market values of debt and equity). Do you agree with this approach? Discuss any limitations that you think this approach could create for performance evaluation.
| 2015 | 2016 | 2017 | 2018 | |
| Revenue | 10,764 | 11,239 | 11,090 | 11,644 |
| Operating expenses, excl. R&D | -7,112 | -7,586 | -7,940 | -7,200 |
| R&D expense | -1,563 | -1,644 | -1,740 | -1,755 |
| Operating income | 2,089 | 2,009 | 1,410 | 2,689 |
| Interest expense | -712 | -725 | -730 | -731 |
| Net income | 1,377 | 1,284 | 680 | 1,958 |
| Ending total assets | ||||
| At net book value | 20,160 | 20,048 | 24,635 | 27,667 |
| At estimated market value | 27,000 | 27,000 | 26,000 | 25,000 |
| Ending non-interest yielding liabilities | 3,245 | 3,098 | 3,677 | 3,902 |
| Ending estimated market value of equity | 10,500 | 10,500 | 10,000 | 9,500 |
| Tax rate | 0% | 0% | 0% | 0% |
| WACC | 6.17% | 6.17% | 6.15% | 6.14% |
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started
Introduction to Managerial Accounting
Authors: Peter Brewer, Ray Garrison, Eric Noreen
7th edition
978-0078025792
