Performance Auto Company operates a New Car Division (that sells high performance sports cars) and a Parts Division (that sells performance improvement parts for family cars). Some division financial measures for 2018 are as follows: i Data Table Total assets Current liabilities New Car Performance Division Parts Division 31,562,500 $ 25 550 000 8,600,000 S 8.500.000 2,525,000 $ 2.555.000 12% 12% $ $ Operating income Required rate of return Requirement 1. Calculate ROI for each division using operating income as a measure of income and total assets as a measure of investment. (Enter the ROI as a percent rounded to one decimal place in the format X.X%) New Car Division Performance Parts Division x 100 = x 100 = x 100 = ROI % % Requirement 2. Calculate RI for each division using operating income as a measure of income and total assets minus current liabilities as a measure of investment (Use parentheses or a minus sign to enter residual losses) New Car Division Performance Parts Division Requirement 3. William Abraham, the New Car Division manager, argues that the Performance Parts Division has "loaded up on a lot of short-term debt" to boost its RI. Calculate an alternative RI for each division that is not sensitive to the amount of short-term debt taken on by the Performance Parts Division Comment on the result (Use parentheses or a minus sign to enter residual losses) RI New Car Division Performance Parts Division V has a relatively worse Ri than the Division V negative, indicating that With this new measure that is insensitive to the level of short-term debt, the V earning the 12% required rate of return on their assets. Requirement 4. Performance Auto Company, whose tax rate is 10%, has two sources of funds long term debt with a market value of $18,000,000 at an interest rate of 10% and equity capital with a market value of $12,000,000 and a cost of equity of 17%. Applying the same weighted average cost of capital (WACC) to each division, calculate EVA for each division Begin by determining the formula to calculate WACC. - WACC The company's WACC is (Enter the amount as a decimal. Round the WACC to five decimal places in the format X.XXXXX.) Determine the formula to calculate the EVA of each Division. Then enter the amounts for the New Car Division and the Performance Parts Division and calculate the EVA for each. (Enter the WACC to five decimal places in the format Xxxxxx. Round your intermediate calculations to the nearest whole number. Use parentheses or a minus sign when entering a negative EVA.) = EVA New Car Division Performance Parts Division: - Requirement 5. Use your preceding calculations to comment on the relative performance of each division Division has a higher residual income The EVA for Both the residual income and the EVA calculations indicate that the Division is performing nominally better than the other Division The indicates that on an after-tax basis the division(s) is (are) value
