1. Consider the following data, which relate to the two divisions of McIntyre Pr

Question

1. Consider the following data, which relate to the two divisions of McIntyre Products:

Compare the two divisions in terms of return on investment and residual income. In the past year, which division has created the most wealth for McIntyre shareholders? (Round ROI to 2 decimal place, e.g. 15.25%.)

2.

The following income statements and other information are available for the Schneider Company:

Calculate EVA for 2014. Assume that for purposes of calculating EVA, the company capitalizes research and development expenditures and amortizes them over three years, including the year they are incurred. For external reporting purposes, research and development is expensed in the year incurred, as indicated in the income statements above. (Round answer to the nearest whole dollar, e.g. 5,725.)

Division 1 Division 2 Total assets $70,000,000 $23,500,000 Noninterest-bearing current liabilities 4,500,000 2,360,000 NOPAT 12,400,000 5,880,000 Required rate of return 10% 10%

Explanation / Answer

Invested capital

Division 1

Division 1 Division 2 Total assets $70,000,000 $23,500,000 Noninterest-bearing current liabilities 4,500,000 2,360,000 NOPAT 12,400,000 5,880,000 Required rate of return 10% 10%

Invested capital

$65,500,000 $21,140,000 ROI 18.93% 27.81% Required Return               6,550,000            2,114,000 Residual income=               5,850,000            3,766,000 Residual income% 8.93% 17.81%

Division 1

Division 2 ROI 18.93% 27.81% Residual income/EVA               5,850,000            3,766,000 Residual income% 8.93% 17.81% 2014 2013 2012 Sales $378,200,000 $258,100,000 $195,900,000 Less cost of goods sold 208,010,000 123,888,000 94,032,000 Gross margin 170,190,000 134,212,000 101,868,000 Less:       Selling and administrative costs 26,474,000 25,810,000 19,590,000       Research and development Amortization 12,609,333 7,566,667 3,265,000 Income from operations 131,106,667 100,835,333 79,013,000 Less taxes on income 38,576,400 29% 28,649,100 0.284118 21,744,900 Net income $92,530,267 $72,186,233 $57,268,100 Total assets $717,000,000 $668,800,000 $437,500,000 Add Total R&D cost as asset 15,128,000 12,905,000 9,795,000 Less Amortization -3,265,000 -3,265,000 -3,265,000 -4,301,667 -4,301,667 ($5,042,667) R& D Book net book value $14,387,000 $11,868,333 $6,530,000 Total Assets $731,387,000 $0 $680,668,333 $0 $444,030,000 Noninterest-bearing current liabilities 144,300,000 11,150,000 98,690,000 Invested Capital 587,087,000 669,518,333 345,340,000 Cost of capital 12% 12% 12% EVA 2014 = NOPAT - Cost of capital*invested capital =92,530,267-0.12*587087000 $        22,079,827 EVA 2014= $22,079,827

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