The following data are available for two divisions of Solomons Company: North Di
ID: 2389213 • Letter: T
Question
The following data are available for two divisions of Solomons Company:North Division South Division
Division operating profit $ 7,000,000 $ 39,000,000
Division investment 28,000,000 260,000,000
The cost of capital for the company is 10 percent. Ignore taxes.
Requirement 1:
(a) What is the ROI for two divisions? (Omit the "%" sign in your response.)
North division %
South division %
(b) If Solomons measures performance using ROI, which division had the better performance?
Requirement 2:
(a) What is the economic value added (EVA) for two divisions? (Omit the "$" sign in your response.)
North division $
South division $
(b)
If Solomons measures performance using economic value added, which division had the better performance? (The divisions have no current liabilities.)
Requirement 3:
(a)
What is the economic value added (EVA) for two divisions if the company's cost of capital were 20 percent? (Negative amounts should be indicated by a minus sign. Omit the "$" sign in your response.)
North division $
South division $
Explanation / Answer
Compare Alternative Measures of Division Performance: Solomons Company.
North:-----25%
North: $7,000,000 = 25% x $28,000,000
South-------15%
South: $39,000,000 = 15% x $260,000,000
======================
North: $7,000,000 (10% x $28,000,000) = $4,200,000
South: $39,000,000 (10% x $260,000,000) = $13,000,000
=========================
c. Using ROI, the comparison is not affected by the cost of capital; the cost of capital serves only as a benchmark against which to judge ROI.
For EVA, the comparison is affected.
North: $7,000,000 (20% x $28,000,000) = $1,400,000
South: $39,000,000 (20% x $260,000,000) = ($13,000,000)
North division with better performance
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