Superior Leather Products, Inc., has two divisions: Travel Bags Division and Leather Accessories Division. The following table

Question:

Superior Leather Products, Inc., has two divisions: Travel Bags Division and Leather Accessories Division. The following table presents their performance for the most recent year.

Required:
a. Calculate the return on investment (ROI) for each division. Use operating income as the measure of income and use the total assets as the measure of investment.
b. Calculate the residual income for each division. Assume the required rate of return on investment is 12%.
c. Superior Leather has outstanding long-term debt with a market value of $3 million and an interest rate of 8%. Its equity capital has a market value of $7 million. The cost of equity is 12%. The income tax rate is 30%. Calculate the economic value added for each division. Recall that WACC = (1-tax rate) Ã— % financed from debt Ã— cost of debt + % financed from equity Ã— cost of equity
d. Which of the three measures would you recommend?Why?

Cost Of Debt
The cost of debt is the effective interest rate a company pays on its debts. It’s the cost of debt, such as bonds and loans, among others. The cost of debt often refers to before-tax cost of debt, which is the company's cost of debt before taking... Cost Of Equity
The cost of equity is the return a company requires to decide if an investment meets capital return requirements. Firms often use it as a capital budgeting threshold for the required rate of return. A firm's cost of equity represents the...