Question : Answer the following questions using the information below: The Bandage Medical : 1217145

 

Answer the following questions using the information below:

 

The Bandage Medical Supply Company has two divisions that operate independently of one another. The financial data for the year 2012 reported the following results:

 

NorthSouth

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

Operating income1,500,0001,100,000

Taxable income1,300,000750,000

Investment12,000,00010,000,000

 

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) 0.110 and 0.125

B) 0.108 and 0.075

C) 0.125 and 0.110

D) 0.125 and 0.150

 

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 a negative $300,000

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) After-tax operating income minus the after-tax weighted-average cost of capital multiplied by total assets minus current liabilities equals:

A) return on investment

B) residual income

C) economic value added

D) weighted-average cost of capital

 

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

A) economic value added

B) return on investment

C) return on equity

D) weighted-average cost of capital

36) A negative feature of defining investment by EXCLUDING the portion of total assets employed that are financed by short-term creditors is that:

A) current liabilities are sometimes difficult to define

B) short-term debt is always more expensive to finance than long-term debt

C) this method encourages managers to use an excessive amount of short-term debt

D) this method encourages managers to use an excessive amount of long-term debt

 

37) 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%. What is Springfield’s weighted average cost of capital (WACC)?

A) .0480

B) .0800

C) .0912

D) .1000

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 (EVA®) for the Blue Division?

A) -$233,400

B) $21,960

C) $188,600

D) $433,960

 

39) 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’s after-tax cost of debt is:

A) .0320

B) .0480

C) .0800

D) .0912

40) 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

 

Calculate EVA® for the Gold Division.

A) ($283,200)

B) ($82,560)

C) $196,800

D) $397,440