Company manufactures guidance systems for rockets used to launch Solar System co

Question

Company manufactures guidance systems for rockets used to launch Solar System commercial satellites. The company's software division reported the f for 2017 ollowing results Income:$300,000 Sales revenue: 2,000,000 Invested capital (total assets): 3,000,000 Average balance in current liabilities: 20,000 Solar Systems' WACC is 9% and the company's tax rate is 40%. Moreover, the company's required rate of return on investment is 996. a) Compute software division sales margin, capital turnover, return on investment, residual income, and economic value added for 2017 b) If income and sales remain the same in 2018, but the division's capital turnover improves to 80%, compute the following for 2018 a. a) invested capital b. b) RO

Explanation / Answer

(a).

Sales margin = Income / Sale revenue

Income is given = $300000

Sale revenue is given = $2000000

Thus sales margin ($300000 / $2000000) = 15%

Capital turnover = Sales revenue / Invested capital

Sales revenue is given = $2000000

Invested capital is given = $3000000

Thus capital turnover ($2000000 / $3000000) = 66.67%

Return on investment = Net income / Invested capital

Net income = $300000

Invested capital = $3000000

Thus return on investment ($300000 / $3000000) = 10%

Residual income = Net income – Required minimum income

Net income = $300000

Required minimum income ($3000000 * 9 / 100) = $270000

Thus Residual income = $300000 – $270000 = $30000

Economic value added = Actual return – Minimum required return

Actual return = 10%

Minimum required return = 9%

Thus economic value added (10% - 9%) = 1%

(b).

a) Invested capital will be calculated as follow;

Formula of capital turnover = Sales revenue / Invested capital

Capital turnover is given = 80%

Sales revenue is given = $2000000

Now let’s put these values in above given formula;

.80 = $2000000 / Invested capital

Thus invested capital will be ($2000000 / 0.80) = $2500000

b) ROI will be calculated as follow;

Formula of ROI = Net income / Invested capital

Net income is given = $300000

Invested capital is given = $2500000

Now let’s put these values in above given formula;

ROI ($300000 / $2500000) = 12%

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