Munchies Waste Management has a subsidiary that disposes of hazardous waste and
ID: 2582525 • Letter: M
Question
Munchies Waste Management has a subsidiary that disposes of hazardous waste and a subsidiary that collects and disposes of residential garbage. Information related to the two subsidiaries follows:
1. Calculate ROI for both subsidiaries. (Round answers to 2 decimal places, e.g. 15.32%.)
2. Calculate EVA for both subsidiaries. Note that since no adjustments for accounting distortions are being made, EVA is equivalent to residual income.
3. Which subsidiary has added the most to shareholder value in the last year?
4. Based on the limited information, which subsidiary is the best candidate for expansion?
Hazardous Residential Waste Waste Total assets Net income Interest expense Required rate of return Tax rate $15,211,400 $86,809,000 Noninterest-bearing current liabilities 3,296,100 13,283,700 1,880,400 6,665,300 1,449,200 7,984,800 i3% 40' 10%Explanation / Answer
1. ROI: Hazardous Waste Residential Waste Net Income 18,80,400.00 66,65,300.00 A add: Interest 14,49,200.00 79,84,800.00 B Before tax 33,29,600.00 1,46,50,100.00 Less:40% tax on interest 5,79,680.00 31,93,920.00 C D E D-E NOPAT 27,49,920.00 1,14,56,180.00 F Asset 1,52,11,400.00 8,68,09,000.00 Less: Liabilities 32,96,100.00 1,32,83,700.00 Invested Capital 1,19,15,300.00 7,35,25,300.00 G ROI (F/G*100) 23.08% 15.58% 2. EVA EVA is equivalent to Residual income Hence, NOPAT less Capital Cost is EVA NOPAT 27,49,920.00 1,14,56,180.00 A Investment 1,19,15,300.00 7,35,25,300.00 Required rate of return 10% 13% Required Return 11,91,530.00 95,58,289.00 B EVA A-B 15,58,390.00 18,97,891.00 3 Residential waste has generated more shareholder value in terms of EVA 4. Hazardious is best for expansion considering highe ROI
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