Question
The following data is available for the Canadian automotive manufacturer, Richardson's Auto Parts Inc. for the 2020 fiscal year: Income before income taxes $ 10,000,000
The following data is available for the Canadian automotive manufacturer, Richardson's Auto Parts Inc. for the 2020 fiscal year:
| Income before income taxes | $10,000,000 | ||
| Income tax expense (40%) | 4,000,000 | ||
| Assets, Jan 1, 2010 | 80,000,000 | ||
| Assets, Dec 31, 2010 | 90,000,000 | ||
| Invested capital - book value | 20,000,000 | ||
| Invested capital - market value | 60,000,000 |
The company believes in rewarding performance by declaring bonuses equal to 10% of income before taxes if the following criteria are met:
- ROI must exceed 11%; and
- RI must be positive using 12% as the minimum rate of return.
The minority shareholders are upset that the company has been declaring bonuses to its managers even though they feel that they are not receiving an adequate return on their investment. The company's weighted average cost of capital is 10%.
- What is the ROI and residual income for the company. Show calculations. Based on your answer, would the managers receive a bonus for 2010?
- What is the firm's EVA for fiscal 2010. Show calculations.
- Ignoring your answer in Part 1, assume the company declares a 10% bonus to its managers. How would the bonus effect your EVA calculation from Part 2? Show calculations.
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Income Tax Fundamentals 2013
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
31st Edition
1111972516, 978-1285586618, 1285586611, 978-1285613109, 978-1111972516
