Question :
180.Stand Up Comics operates comedy clubs in in several states. : 1302912
180.Stand Up Comics operates comedy clubs in in several states. The following financial information is available for 2014and 2013.
20142013
Income from operations$ 900,000$850,000
Net income537,420507,000
Interest expense6,0005,000
Total assets4,000,0003,500,000
Noninterest-bearing current liabilities290,000280,000
Research & development costs200,000160,000
Income tax rate40%40%
Required rate of return7%6.5%
Cost of capital5%4%
Intangibles are amortized over 4 years. Although net income has increased by 6 percent, a shareholder evaluating the company’s financial performance asserts that, financial performance has decreased in 2014. Support this assertion with appropriate calculations of economic value added.
CHALLENGE EXERCISES
181.CocaCola has 3 divisions. It uses a 10.9 percent required rate of return. Its Dasani Division has an invested capital amounting to $998,000 and reported profits of $122,000 during the current year. The division manager is considering whether expanding the shipping docks at an estimated cost of $182,000 will enhance the division. The expansion is expected to increase annual income by an estimated $18,100.
a. Calculate the Dasani Division’s ROI if the docks are expanded.
b. What will the Dasani Division’s manager most likely do if he is evaluated using ROI?Briefly justify why the manager will take that action.
182.Outkast Division of Music, Inc. has a 5.5 percent cost of capital and a 25 percent income tax rate. The company compiled the following information for Outkast Division in 2014:
Total assets$10,700,000
Net income1,200,000
Sales9,800,000
Current liabilities, interest bearing540,000
Current liabilities, non-interest bearing620,000
Interest expense510,000
a. Name and calculate the two components of ROI.
b. Show how the components in part A can be used together to calculate ROI.
c.Interpret your answer to part b.
183.LB Division of BulbCo had net income totaling $56,700, sales totaling $650,000, no interest cost, and a 30 percentincome tax rate for 2014. Invested capital totals $540,000. BulbCo’s required rate of return is 8 percent and its cost of capital is 6 percent. The 2014 ROI of LB Division is 10.5 percent. LB Division is considering an investment in a new machine on January 1, 2015 that will generate additional annual sales of $76,000 and additional annual operating expenses (other than depreciation) totaling $39,000. The cost of the new machine is $140,000 with an estimated salvage value of $15,000 at the end of its 5-year estimated life. LB will pay cash for the machine.
a.Calculate NOPAT for 2015 if LB Division acquires the new machine.
b. Assuming no change in original operations, determine the 2015return on investment if LB buys the machine.
c. If LB Division’s manager is evaluated on ROI, will he accept the project? Briefly justify your response.
184.Frigate Co. compiled the following information concerning its West Division for 2014:
Sales revenue$10,500,000Research and development costs$940,000
Invested capital12,900,000Current liabilities-interest bearing210,000
NOPAT870,000Current liabilities-non-interest bearing320,000
R&D costs incurred by West Division during 2013 totaled $700,000. The company’s notes indicate its amortization policy is 5 years. Frigate has a 7.8 percent cost of capital, a 9.1 percent required rate of return, and a 32 percent income tax rate.
How much is EVA for the West Division for 2014?
What information is provided by Frigate’s EVA for 2014?
185.The Florida Division is being evaluated by upper management of the parent company, Assistance Corporation. The following amounts were determined for Florida Division for 2014:
Residual income$333,600
Return on investment10.6%
Economic value added$464,760
Interpret each of the three amounts as it applies to Florida Division for 2014.
