Information Operating Total Current Sales Income Assets Liabilities $ 4,000,000 $ 440,000 $ 1,250,000 $ 355,000 1,140,000 148,200 1,425,000 620,000 Paint stores Consumer Print Done - X Requirements Round all calculations to two decimal places. 1. Calculate each division's ROI. 2. Calculate each division's profit margin. Interpret your results. 3. Calculate each division's asset turnover. Interpret your results. 4. Use the expanded ROI formula to confirm your results from Requirement 1. Interpret your results. 5. Calculate each division's RI. Interpret your results, and offer recommendations for any division with negative RI. 6. Calculate each division's EVA. Interpret your results. 7. Describe the conceptual and computational similarities and differences between RI and EVA. 8. Total asset data were provided in this problem. If you were to gather this information from an annual report, how would you measure total assets? Describe your measurement choices and some of the pros and cons of those choices. 9. Describe some of the factors that management considers when setting its minimum target rate of return. 10. Explain why some firms prefer to use Rl rather than ROI for performance measurement. 11. Explain why budget versus actual performance reports are insufficient for evaluating the performance of investment centres. Print Done Sunshine Paints is a national paint manufacturer and retailer. The company is segmented into five divisions: Paint Stores (branded retail locations), Consumer (paint sold through stores such as Canadian Tire, Home Hardware, and Lowe's), Automotive (sales to auto manufacturers), International, and Administration. The following is selected divisional information for the company's two largest divisions: Paint Stores and Consumer (in thousands of dollars). (Click the icon to view the information.) Assume that management has specified a 21% target rate of return. Further assume that the company's weighted average cost of capital is 17% and its effective tax rate is 28%. Requirements Requirement 1. Calculate each division's ROI. First, enter the formula, and then calculate the ROI for each division. (Round your answer to two decimal places.) ROI Paint stores 1 % Consumer % Requirement 2. Calculate each division's profit margin. Interpret your results. Enter the formula, and then calculate the profit margin for each division. (Enter the sales margin as a percent rounded to two decimal places.) Profit margin Paint stores Consumer % Interpret your results. The Division is more profitable on each dollar of sales. Requirement 3. Calculate each division's asset turnover. Interpret your results. First, enter the formula, and then calculate the asset turnover for each division. (Round your answer to two decimal places.) = Asset turnover Paint stores times Consumer times Interpret your results. The Division is more efficient in generating sales with its assets. Requirement 4. Use the expanded ROI formula to confirm your results from Requirement 1. Interpret your results. First, enter the expanded ROI formula, and then calculate the ROI for each division. (Round your answer to two decimal places.) ROI Paint stores % X % Consumer % Interpret your results. The Consumer Division's profitability on each dollar of sales is Division's ROI. than the Paint Stores Division's profitability. However, the Paint Store Division's efficiency is significantly than the Consumer Division's efficiency. These results cause the Paint Stores Division's ROI to be the Consumer Requirement 5. Calculate each division's RI. Interpret your results, and offer recommendations for any division with negative RI. First, enter the formula, and then calculate the RI for each division. (Use parentheses or a minus sign for negative residual incomes.) X RI Paint stores X % ) = Consumer X %) = Interpret your results, and offer recommendations for any division with negative RI. meeting management's target rate of return. The should work on improving its V. Improving this may help the division achieve positive residual income. Requirement 5. Calculate each division's RI. Interpret your results, and offer recommendations for any division with negative RI. First, enter the formula, and then calculate the RI for each division. (Use parentheses or a minus sign for negative residual incomes.) X RI Paint stores X % Consumer x %) = Interpret your results, and offer recommendations for any division with negative RI. meeting management's target rate of return. The should work on improving its Improving this may help the division achieve positive residual income. Requirement 6. Calculate each division's EVA. Interpret your results. (Use parentheses or a minus sign for negative EVA's.) - x 1 = EVA Paint -16 )x % = Cons -10 % ] = Interpret your results. creating more income than the company's shareholders and long-term creditors expect. Requirement 7. Describe the conceptual similarities and differences between and EVA equations calculate(s) whether any income was created by the division above and beyond expectations. looks at income through the eyes of management, while looks at it through the eyes of the stockholders and long-term creditors. Describe how the EVA computation differs from the Rl computation. The EVA calculation uses where the Rl calculation uses Why? Because the portion of income paid to the government available to investors and long-term creditors. Unlike RI, within the EVA computation, total assets are reduced by V. Why? Because funds owed to be available for generating income in the long run. short-term creditors paid in the immediate future and Since focuses on investors and creditors, it's calculation uses the V, which represents the investors and creditors expected rate of return. Requirement 8. Total asset data were provided in this problem. If you were to gather this information from an annual report, how would you measure total assets? Describe your measurement choices and some of the pros and cons of those choices. Most companies use the asset balance since the income used in the ROI calculation is earned over the year. Management must also decide whether it wishes to use the gross book value of assets or the net book value of assets. The book value is often used because it is easily pulled from the balance sheet. However, ROI using that value will artificially rise over time due to Requirement 9. Describe some of the factors that management considers when setting its minimum rate of return. Requirement 10. Explain why some firms prefer to use Rl rather than ROI for performance measurement. RI does a better job of Requirement 11. Explain why budget versus actual performance reports are insufficient for evaluating the performance of investment centres. Investment centres are responsible for Budget versus actual performance reports are insufficient because they do not measure