Question

Operating Income For Segments

Xenold, Inc., manufactures and sells cooktops and ovens through three divisions: Home, Restaurant, and Specialty. Each division is evaluated as a profit center. Data for each division for last year are as follows (numbers in thousands):

	Home	Restaurant	Specialty
Sales	$4,130	$3,600	$2,520
Cost of goods sold	2,900	2,620	1,700
Selling and administrative expenses	950	410	320

The income tax rate for Xenold, Inc., is 40 percent. Xenold, Inc., has two sources of financing: bonds paying 5 percent interest, which account for 25 percent of total investment, and equity accounting for the remaining 75 percent of total investment. Xenold, Inc., has been in business for over 15 years and is considered a relatively stable stock, despite its link to the cyclical construction industry. As a result, Xenold stock has an opportunity cost of 5 percent over the 4 percent long-term government bond rate. Xenold’s total capital employed is $5.05 million ($2,600,000 for the Home Division, $1,700,000 for the Restaurant Division, and the remainder for the Specialty Division).

Required:

1. Prepare a segmented income statement for Xenold, Inc., for last year. Enter the amounts in thousands.

Xenold, Inc.
Income Statement (in thousands)
For the Year 20XX
	Home	Restaurant	Specialty	Total
Sales	$	$	$	$
Cost of goods sold
Gross profit	$	$	$	$
Selling and administrative expense
Division profit	$	$	$	$
Income taxes
After-tax income	$	$	$	$

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2. Calculate Xenold’s weighted average cost of capital. Enter your answer as a decimal value rounded to three places. For example, 4.36% would be entered as ".044". Round your calculations to four decimal places.

3. Calculate EVA for each division and for Xenold, Inc. In your computations, carry the weighted average cost of capital to three decimal places. If the EVA is negative, enter your answer as a negative amount. Enter amounts as whole dollars not in thousands.

	EVA
Home	$
Restaurant	$
Specialty	$
Total	$

Answer 1

AnSwer xenold inc Manu Pac tured and and Sell Cook to Ps Oven through three division Panci ly Rat auant Tatal Home Sale Castof goods Sold 16,a50 2 5 20 3, 600 u 130 220 ,400 2400 26 20 (to250 2520-1ay) 3,600 -2620) 220 Gross Profit lu130-2900) 820 3, 030 80 230 Seling gno administratie 680 320 u lo a50 exPense (3e03 80 (8203r0) ago-uito) ,2 30-950 Oivision Prof 43 50) 500 550 bax 2. In CoMe 220 5uO (1350-Su) APlen tax 500-200) 550-26) (280 112) in com e 300 8 336

(2) Calalate Xen olds eghted wei Cost of apital awen age callala tion to four decimal Round your Value Pencent wighbed Afl ta Cost weighled avenage caPatial 0075 a09 O 075 COMMON O 25X00 Bond o 25 3) The a venage Cost of Captal Places decimal to Hree of ptal Coat Restaurant sPecialiy Home Capital enptoyed 50000 2,600000 weight auenage Costof capta 56250 1500

Resturant Home seciality Total Ec ionim ic value added 78,00 333, 000 3,00000 810000 56256 After taxinione 37125a 195 o00 ( 3 o0000 5625325) &l0006 ( 333 000 -120060 Cast of captal (78004195000) (110000) (1600)