Question

Heather Smith Cosmetics (HSC) manufactures a variety of products and is organized into three divisions (investment centers): soap products, skin lotions, and hair products. Information about the most recent year’s operations follows. The information includes the value of intangible assets, including research and development, patents, and other innovations that are not included on HSC’s balance sheet. Were these intangibles to be included in the financial statements (as they are for EVA®), the increase in the balance sheet and the increase in after-tax operating income would be as given below:

Division	Operating Income			Average Total Assets			Value of Intangibles			Intangibles’ Effect on Income
Soap products	$	3,243,000		$	59,993,000		$	1,493,000		$	993,000
Skin lotions		2,743,000			32,993,000			7,993,000			5,993,000
Hair products		4,993,000			54,993,000			993,000			693,000
Minimum desired rate of return		5.00	%
Cost of capital		4.00	%

Required:

1. Calculate the return on investment (ROI) for each division. (Round your answers to 2 decimal places. (i.e. .1234 = 12.34%))

2. Calculate the residual income (RI) for each division.

3. Calculate EVA^® for each division.

Answer 1

ANSWER:

	net operating income	avg operating assets
soap products	3,243,000	59,993,000
skin lotion	2,743,000	32,993,000
hair products	4,993,000	54,993,000
min desire rate of return	5.00%
cost of capital	4.00%

ROI= net operating income / avg operating assets *100
soap products	5.40	%
skin lotion	8.31	%
hair products	9.08	%

RI= operating income - (avg operating assets * desired rate of return)
soap products	243350
skin lotion	1093350
hair products	2243350

EVA= operating income - (avg operating assets * cost of capital)
soap products	843280
skin lotion	1423280
hair products	2793280

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