Question
The following data are available for two divisions of Solomons Company. North Division South Division Division operating profit $ 6,720,000 $ 43,470,000 Division investment 32,000,000
The following data are available for two divisions of Solomons Company.
| North Division | South Division | |||||
| Division operating profit | $ | 6,720,000 | $ | 43,470,000 | ||
| Division investment | 32,000,000 | 322,000,000 | ||||
The cost of capital for the company is 7 percent. Ignore taxes.
Required:
a-1. Calculate the ROI for both North and South divisions.
a-2. If Solomons measures performance using ROI, which division had the better performance?
b-1. Calculate the EVA for both North and South divisions. (The divisions have no current liabilities.)
b-2. If Solomons measures performance using economic value added, which division had the better performance?
c. Would your evaluation change if the companys cost of capital was 16 percent?
1. When evaluated by ROI?
2. When evaluated by EVA?
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