Assume that the financial statements for Division 1 of the ABC Company Showed th

ID: 2504889 • Letter: A

Question

Assume that the financial statements for Division 1 of the ABC Company Showed the following for last year and at the last year end (in thousands).

SALES $10,000,000

OPERATING INCOME $2,000,000

TOTAL ASSETS $20,000,000

CURRENT LIABILITIES $1,000,000

MANAGEMENTS REQUIRED RATE OF RETURN IS 8%

THE COMPANYS AVERAGE WEIGHTED COST OF CAPITAL IS 6%

THE COMPANYS EFFECTIVE INCOME TAX RATE IS 30%

A. WHAT IS THE DIVISIONS PROFIT MARGIN?

B. WHAT IS THE DIVISIONS RETURN ON INVESTMENT (ROI)?

C. WHAT IS THE DIVISIONS RESIDUAL INCOME (RI)?

D. WHAT IS THE DIVISIONS ECONOMIC VALUE ADDED (EVA)?

Profit Margin = Operating Income / Sales * 100
= 2,000,000 / 10,000,000 *100
= 20%

Return on Investment = Operating Income / Assets * 100
= 2,000,000 / 20,000,000 *100
= 10%

Residual Income = (Actual Return

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