Question : Answer the following questions using the information below: Care Inc., has : 1212031

 

Answer the following questions using the information below:

 

Care Inc., has two divisions that operate independently of one another. The financial data for the year 2015 reported the following results:

 

NorthSouth

Sales$6,000,000$5,000,000

Operating income1,500,0001,200,000

Taxable income1,200,000700,000

Investment14,000,00010,000,000

 

The company’s desired rate of return is 10%. Income is defined as operating income.

 

31) What are the respective return-on-investment ratios for the North and South Divisions?

A) 10.00% and 15.00%

B) 11.71% and 14.00%

C) 10.71% and 12.00%

D) 12.50% and 15.00%

 

32) What are the respective residual incomes for the North and South Divisions?

A) $60,000 and $100,000

B) $300,000 and $60,000

C) $300,000 and $100,000

D) $100,000 and $200,000

 

33) Which division has the best return on investment and which division has the best residual income figure, respectively?

A) North, North

B) South, South

C) North, South

D) South, North

34) Economic value added is equal to ________.

A) After-tax operating income – [Weighted-average cost of capital + (Total assets – Current liabilities)]

B) Pre-tax operating income – [Weighted-average cost of capital + (Total assets – Current liabilities)]

C) After-tax operating income – [Weighted-average cost of capital × (Total assets – Current liabilities)]

D) Pre-tax operating income – [Weighted-average cost of capital × (Total assets – Current liabilities)]

 

35) The after-tax average cost of all the long-term funds used by a corporation equals ________.

A) economic value added

B) cost of goodwill

C) interest cost of the capital

D) weighted-average cost of capital

 

36) Which of the following satisfies the DuPont method of profitability analysis?

A) Income / Investment = Income / Total costs + Revenues / Equity

B) Income / Investment = Income / Revenues + Revenues / Investment

C) Income / Investment = Income / Revenues × Revenues / Investment

D) Income / Investment = Income / Total costs × Revenues / Equity

 

37) Springfield Corporation, whose tax rate is 30%, has two sources of funds: long-term debt with a market value of $6,000,000 and an interest rate of 8%, and equity capital with a market value of $15,000,000 and a cost of equity of 12%. What is Springfield’s weighted average cost of capital (WACC)?

A) 9.17%

B) 9.57%

C) 10.17%

D) 11.17%

38) Springfield Corporation, whose tax rate is 40%, has two sources of funds: long-term debt with a market value of $8,000,000 and an interest rate of 8%, and equity capital with a market value of $12,000,000 and a cost of equity of 12%. Springfield has two operating divisions, the Blue division and the Gold division, with the following financial measures for the current year:

 

 

Total Assets

Current Liabilities

Operating Income

Blue Div.

$9,500,000

$2,800,000

$1,055,000

Gold Div.

$11,000,000

$2,200,000

$1,200,000

 

What is Economic Value Added () for the Blue Division?

A) -$233,400

B) $21,960

C) $188,600

D) $433,960

 

39) Times Corporation, whose tax rate is 40%, has two sources of funds: long-term debt with a market value of $6,000,000 and an interest rate of 9%, and equity capital with a market value of $18,000,000 and a cost of equity of 11%. Times Corporation’s after-tax cost of debt is ________.

A) 3.40%

B) 5.40%

C) 5.00%

D) 7.40%

40) Stonex Corp, whose tax rate is 40%, has two sources of funds: long-term debt with a market value of $6,000,000 and an interest rate of 8%, and equity capital with a market value of $14,000,000 and a cost of equity of 12%. Stonex has two operating divisions, the Blue division and the Gold division, with the following financial measures for the current year:

 

 

Total Assets

Current Liabilities

Operating Income

Blue Div.

$9,500,000

$2,500,000

$1,155,000

Gold Div.

$10,000,000

$2,400,000

$1,200,000

 

Calculate EVA for the Gold Division.

A) ($57,640)

B) ($27,840)

C) ($37,340)

D) $397,440