Just 5~11

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Benjamin Moore 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). Operating Total Current Sales Income Assets Liabilities Paint stores ... $ 3,920,000 $ 490,000 $ 1,400,000 $ 350,000 Consumer 1,200,000 180,000 1,600,000 600,000 Assume that management has specified a 20% target rate of return. Further assume that the company's weighted average cost of capital is 15% and its effective tax rate is 32%. 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.) Operating income Total assets ROI Paint stores 490000 1400000 Consumer 231000 2000000 11.55 % = 35 % 11 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.) Operating income Sales Profit margin Paint stores 490000 3920000 12.50% Consumer 231000 1400000 16.50% 11 II Interpret your results. The Consumer 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.) Sales Total assets Asset turnover Paint stores 3920000 1400000 2.80 times Consumer 1400000 2000000 0.70 times II 11 Interpret your results The Paint Stores 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.) Profit margin Asset turnover ROI Paint stores 12.50% 2.8 35% Consumer 0.7 X 16.50% II 11.55 % Interpret your results. The Consumer Division's profitability on each dollar of sales is higher than the Paint Stores Division's profitability. However, the Paint Store Division's efficiency is significantly higher than the Consumer Division's efficiency. These results cause the Paint Stores Division's ROI to be higher than the Consumer Division's ROLL 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 Rl for each division. (Use parentheses or a minus sign for negative residual incomes.) ( X RI Paint stores % ) = Consumer X % ) = Interpret your results, and offer recommendations for any division with negative RI. should work on improving its meeting management's target rate of return. The 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.) - ) = EVA Paint - [C ) x % ] = Cons. - [C 1 x % ] = 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 RI and EVA. looks at income through the eyes equations calculate(s) whether any income was created by the division above and beyond expectations. 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. Why? Because the portion of income paid to The EVA calculation uses where the RI calculation uses the government available to investors and long-term creditors. Unlike RI, within the EVA computation, total assets are reduced by short-term creditors paid in the immediate future and Why? Because funds owed to be available for generating income in the long run. which represents the investors and Since focuses on investors and creditors, it's calculation uses the 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. After-tax operating income Assets less current liabilities amount Competitors' rate of return General economic conditions Interest rates on the company debt Investors' expectations Return being serviced by other divisions Risk level of the division's business r than ROI for performance measurement. Requirement 10. Explain why some firms prefer to use Rl rather than ROI for performance measurement. RI does a better job of Requirement 11. Expla valuating the performance of investment centres. Budget versus actual performance reports Investment centres are insufficient because the focusing on shareholders' and creditors rate of return getting management to make sure their division is profitable goal congruence increasing the return on investment Choose from any list o xt question. 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