Question

ROI, Residual Income, and EVA with Different Bases Envision Company has a target return on capital of 12 percent. The following financial information is available for October ($ thousands): Software Division Consulting Division Venture Capital Division (Value Base) (Value Base) (Value Base) Current Book Current Book Current $120,000 $120,000 $220,000 $220,000 $820,000 $820,000 Income 14,750 14,200 18,900 22,520 59,230 54,420 70,000 90,000 100,000 110,000 610,000 590,000 Liabilities 10,000 10,000 14,000 14,000 40,000 40,000 Book Sales Assets 0.092 Required a. Compute the return on investment using both book and current values for each division. Round answers to three decimal places. Book Value Current Value Software 0.211 0.158 Consulting 0.189 0.205 Venture Capital 0.097 b. Compute the residual income for both book and current values for each division. Use negative signs with answers, when appropriate. Book Value Current Value Software 6,350 $ (4,162) Consulting 6,900 9,320 Venture Capital (13,970) (16,380) c. Compute the economic value added income for both book and current values for each division if the tax rate is 30 percent and the weighted average cost of capital is 10 percent. Use negative signs with answers, when appropriate. Book Value Current Value Software 3,325 x $ 940 x Consulting 3,230 x 4,764 x Venture Capital (19,539) (20,906) $

Answer 1

Requirement a

Calculation of ROI - Book Value Referance Particulars Software Consulting Venture capital А Divisional Operating assets $ 70,000.00 $ 1,00,000.00 $ 6,10,000.00 B Net oprating Income $ 14,750.00 $ 18,900.00 $ 59,230.00 C=B/A ROI 0.2110 0.1890 0.0970

Calculation of ROI - Current Value Referance Particulars Software Consulting Venture capital A Divisional Operating assets $ 90,000.00 $ 1,10,000.00 $ 5,90,000.00 B Net oprating Income $ 14,200.00 $ 22,520.00 $ 54,420.00 C=B/A ROI 0.158 0.205 0.092

Requirement b

Referance A B с D=B-(AXC) Particulars Assets Income Minimum return Residual Income Residual Income - Book value Software $ 70,000.00 $ $ 14,750.00 $ 12% $ 6,350.00 $ Consulting Venture Capital 1,00,000.00 $ 6,10,000.00 18,900.00 $ 59,230.00 12% 12% 6,900.00 $ -13,970.00 Referance Particulars A Assets Residual Income - Current value Software $ 90,000.00 $ 14,200.00 $ 12% 3,400.00 $ B Income Consulting Venture Capital 1,10,000.00 $ 5,90,000.00 22,520.00 $ 54,420.00 12% 12% 9,320.00 $ -16,380.00 C D=B-(AXC) $ $ Minimum return Residual Income

Requirement c

Referance A B = Ax 30% C= A-B Residual Income - Book value Particulars Software Income before tax $ 14,750.00 $ Tax @30% $ 4,425.00 $ Income after Tax $ 10,325.00 $ Assets $ 70,000.00 $ Libilities (assumed as current) $ 10,000.00 $ WACC 10% EVA $ 4,325.00 $ Consulting Venture Capital 18,900.00 $ 59,230.00 5,670.00 $ 17,769.00 13,230.00 $ 41,461.00 1,00,000.00 $ 6,10,000.00 14,000.00 $ 40,000.00 10% 10% 4,630.00 $ -15,539.00 D E F F=C - [(D-E) X F] Referance А B = AX 30% C=A-B Residual Income - Current Value Particulars Software Income before tax $ 14,200.00 $ Tax @30% $ 4,260.00 $ Income after Tax $ 9,940.00 $ Assets $ 90,000.00 $ Libilities (assumed as current) $ 10,000.00 $ WACC 10% EVA $ 1,940.00 $ Consulting Venture Capital 22,520.00 $ 54,420.00 6,756.00 $ 16,326.00 15,764.00 $ 38,094.00 1,10,000.00 $ 5,90,000.00 14,000.00 $ 40,000.00 10% 10% 6,164.00 $ -16,906.00 D E F F=C-[(D-E) XF]

I have given seperate tables for book value and current value. Please look ino the respective tables. Further, all calculations are given in the same table under the couloumn "Referance"