Question 2: Performance Measurement (20 points) BTC has a subsidiary company called the Chiang Rai Forest Company (CRFC), a very large integrated wood and lumber products company with substantial timber holdings has two divisions: Forest and Lumber. Forest division manages the timber holdings, maintains the land and plants and harvests trees. Forest Division's total asset value is stated on CRFC's balance sheet as $2.2 billion (current liabilities are $70 million). Most of the timber the Forest division harvests is sold internally to the Lumber division. Any timber not sold to the Lumber division can be sold externally. The Lumber division can purchase the timber from outside suppliers, but has sourced internally during the past few years. Last year, the Forest division sold 200 million board feet of timber to external customers at $4.50 per board foot. A board foot is a standard unit of measure in the timber business. Forest division sold another 800 million board feet of timber to the Lumber division. The Forest division's operating expenses last year totaled $2 billion. The Lumber division only purchases timber from the Forest division. The purchase price was computed as Lumber's share of Forest's operating costs according to the mandated transfer pricing arrangement. The share of operating cost is based on Lumber's fraction of Forest's total board feet harvested (Note that Lumber purchases 8/10 of Forest's total output). Lumber sells the timber after cutting and processing. Lumber's total revenues are $7.6 billion, other operating expenses (excluding the cost of timbec$>r) are 2 $3.5 billion and assets are $2.7 billion (current liabilities are $90 million), respectively. CRFC uses Value Added measures to evaluate and reward the performance of the senior managers of the two divisions. Assume that included in the operating expenses of each division is an advertising expense of $750 million. The company bclicves advertising will equally impact three years of sales after advertising. CRFC has a long-term debt of $ 2.2 billion at an interest rate of 12% and an equity capital of $3.5 billion at a cost of equity of 14%. Income tax rate is 40%. The manager who consistently shows the better division al performance is most likely to be promoted to the General Manager position. Required 1. Calculate the ROI (2 points), Residual Income (2 points) and EVA (use the relevant data) for both divisions (6 points). 2 points each for each part below. 2. Which division is more profitable? Why? (Be as comprehensive as necessary. Support all statements and assertions with detailed calculations, as required. You may also refer to calculations provided in part 1, without repeating them) 3. Are there any incentive issues likely to arise in the company? Based on your analysis in (2) above, what suggestions do you have for CRFC? 4. Consider only the Forest division. For each of the following questions, calculate to the extent possible) and if you think you do not have the data, indicate whether the margin, turnover and ROI will increase, decrease, or remain unchanged as a result of the events described below. Consider each question separately, starting in each case from the original ROI computed in (1) above. Next year, a. By use of Just In Time methods to control the purchase of some items of raw materials, the company is able to reduce the average level of inventory by $1 billion. b. Sales volume will increase by 10% because of market expansion; operating assets will remain unchanged. c. Obsolete items of inventory carried on the records at a cost of $0.5 billion will be scrapped and written off as a loss