Chapter 9 Graded Homework Due: Wednesday, April 4th at the beginning of class Qu
ID: 2555303 • Letter: C
Question
Chapter 9 Graded Homework Due: Wednesday, April 4th at the beginning of class Question I: Solar System Company manufactures guidance systems for rockets used to launch commercial satellites. The company's software division reported the following results for 2017 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 9%. 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. b. a) invested capital b) ROIExplanation / Answer
Answer for question I
a)
Sales margin = (300000/200000)*100 = 15%
Capital turnover = {2000000/(3000000-20000)}/100 = 67.11%
Return on Investment = (300000/3000000)*100 = 10%
Residual Income = 300000 - {(9/100)*3000000} = $ 30000
Economic value added for 2017:-
Net operating profits after tax = (300000 - (300000*40%)
= $ 180000
Therefore EVA = 180000 - {(9/100}*3000000}
= $ -90000
b)
Invested capital = 2000000*(100/80) = $ 2500000
ROI = (300000/2500000)*1000 = 12%
Answer for Question II
(a) Sales margin = (1450/26500)*100 = 5.47%
Capital turnover = {26500/(16100-3600)}*100 = 212%
ROI = (1450/16100)*100 = 9.006%
(b) Residual income = (1450 - {16100*(16/100)} = -1126
There is a negative residual income which indicates that resources are used poorly. The company is not actually profitable though the operating income is a positive figure.
(c) EVA :-
Net operatig income after tax = 1450 - (1450*30%)
= $ 1015
Therefore EVA = 1015 - (16100*13%) = $ -1078 EVA of the retail division is negative which means that the company is not generating value from the funds invested in the business.
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