Calculating return on investment, residual income, and economic value added Requ

Question

Calculating return on investment, residual income, and economic value
added

Required
Compute the missing amounts labeled a–q.

segment a segment b segment c segment d segment e sales revenue $1,000,000 $1,500,000 i. $400,000 $310,000 operating income $ 100,000 f. $ 420,000 $ 60,000 o. Tax rate 30% 25% 20% l. 20% Total assets $ 500,000 g. $1,400,000 $500,000 $124,000 Current liabilities $ 40,000 $ 40,000 j. $ 40,000 $ 10,000 Corporate required return 15% 18% 16% m. 20% Weighted-avg cost of cptl 12% 14% 15% 10% 18% Margin a. 5% k. 15% 2% Asset turnover b. 3 1.5 n. 2.5 Return on investment c. h. 30% 12% p. Residual income d. $ (15,000) $ 196,000 $ 0 $ (18,600) Economic value added e. $ (8,150) $ 142,800 $ (4,000) q.

Explanation / Answer

Return on investment = Net profit / Total assets

Residual Income = Operating income - Corporate required return x total operating assets employed by the segment.

EVA = Net operating profit after taxes (NOPAT) - weighted average cost of capital * capital employed, where,

Capital employed = total asets - current liabilities

Margin = net profit / sales

Asset Turn over = sales/ total assets

NOPAT = Net income + [Interest expense - Tax savings from interest expense]

              = NI + [Interest expense x (1 - t)

as there is no interest in the given information, for this problem,

NOPAT = NI = operating income - tax = Operating Income (1 - tax rate)

segment a segment b segment c segment d segment e sales revenue 1000000.00 1500000.00 2100000.00 400000.00 310000.00 operating income 100000.00 100000.00 420000.00 60000.00 7750.00 Tax rate 30% 25% 20% 30% 20% Net Income 70000.00 75000.00 294000.00 42000.00 6200.00 Total assets 500000.00 500000.00 1400000.00 500000.00 124000.00 Current liabilities 40000.00 40000.00 392000.00 40000.00 10000.00 Capital Employed 460000.00 460000.00 1008000.00 460000.00 114000.00 Corporate required return 15% 18% 16% 8.40% 20% Weighted-avg cost of capital 12% 14% 15% 10% 18% Margin 7.00% 5% 14.00% 15% 2% Asset turnover 0.5 3 1.5 1.25 2.5 Return on investment 14.00% 15.00% 30.00% 12.00% 5.00% Residual income 25000.00 -15000.00 196000.00 $ 0 -18600.00 Economic value added 14800.00 -8150.00 142800.00 -4000.00 -14320.00

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