ROI, RI and EVA Analyses

The problem must to be completed in the attachment Excel file

Problem 5 - Complete all areas shaded gray. Extreme Toddler divided by equals ROI = = minus - - times x x equals Residual Income (RI) = = minus - - times x x equals Residual Income (RI) = = 1. ROI - Based on Total assets: 2. RI - Based on Total assets - Current liabilities 3. RI - Based on Total assets 4. EVA for each division Companywide calculations: After-tax cost of debt financing After-tax cost of equity financing Weighted average cost of capital: times x + plus times x divided by plus equals WACC Division calculations: Operating income after tax: + = Extreme Toddler x x = = times x x equals Required return for EVA = = minus - - equals EVA = = times equals Operating income after tax Required return for EVA: EVA: Managerial Controls and Budgeting Datar and Rajan - Managerial Accounting (1st Edition) (ISBN - 978-0-13-701273-2). The problem must to be completed in the attachment Excel file Problem 5 ROI, RI and EVA Analyses Ace Computer Company operates an Extreme Machine division (that sells high performance gaming laptops) and a Toddler Tablet division (that sells laptops for family use). Some divisional financial measures for the current year are: Required: 1. Calculate ROI for each division using operating income as a measure of income and total assets as a measure of investment. 2. Calculate residual income (RI) for each division using operating income as a measure of income and total assets minus current liabilities as a measure of investment. 3. C. Ryan Babee, the Extreme Machines Division manager, argues that the Toddler Tablets 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. 4. Ace Computer Company, whose tax rate is 32%, has two sources of funds; long-term debt with a market value of $16,500,000 at an interest rate of 11%, and equity capital with a market value of $12,000,000 and a cost of equity of 14%. Applying the same weightedaverage cost of capital (WACC) to each division, calculate the EVA for each division. 5. Use the preceding calculations to comment on the relative performance of each division