Question

Mary’s Auto Shop Inc. allows its divisions to operate as autonomous units. Their results for the current year were as follows:

               

               

	Sport	Terrain	City
Revenues	$1,700,000	$800,000	$6,000,000
Current assets	230,000	40,000	410,000
Capital assets	870,000	660,000	1,590,000
Current liabilities	100,000	100,000	500,000
Net operating income	234,000	44,000	604,000
After-tax income	188,000	36,000	484,000
Weighted average cost of capital	10%	10%	10%

Required:

For each division compute (to two decimal) the:

1. Return on sales in %

2. Return on investment (to two decimal) based on total assets employed in %

3. Economic value added

4. Residual income based on net operating income

please answer in word

Answer 1

Return on sales in %

  Return on sales (ROS) is a measure of how efficiently a company turns sales into profits.

Return on sales = Net Operating Income / Revenues x 100 ( Tax cannot be considered)

Sport Terrain    City

Return on sales =   ( 234,000/1,700,000)x 100    (44,000/800,000)x100 604,000/6,000,000)x100

= 13.76% 5.5% 10.07%

Return on investment based on total assets employed in %

Return on investment (ROI) is a financial metric that is widely used to measure the probability of gaining a return from an investment. It is a ratio that compares the gain or loss from an investment relative to its cost. It is as useful in evaluating the potential return from a stand-alone investment as it is in comparing returns from several investments.

Total Assets Employed = Capital assets + Current Assets - Current Liabilities

Sport    Terrain City

Capital Assets = 870,000 660,000 1,590,000

Current Assets = 230,000 40,000 410,000

(-) Current Liabilities   = 100,000 100,000 500,000

1,000,000 600,000 1,500,000

therefore ,

Return on Investment = (234,000/1,000,000)x100   (44,000/600,000)x100 (604,000/1,500,000)x100

=   23.4%    7.33% 40.27%

Economic Value Added

In corporate finance, as part of fundamental analysis, economic value added is an estimate of a firm's economic profit, or the value created in excess of the required return of the company's shareholders. EVA is the net profit less the capital charge for raising the firm's capita

Economic Value Added = Non operating profit after tax - (capital invested x Weighted Average Cost of Capital)

      Sport    Terrain City

Non operating profit after tax = 188,000     36,000 484,000

capital invested 870,000    660,000    1,590,000

Weighted Average Cost of Capital =    10% 10%     10%

Therefore,

Economic Value Added =   101,000    (30,000)       325,000

Residual income based on net operating income

Residual Income = Net Operating Income - (Minimum required return x Cost olf Operating Assets)

   Sport Terrain       City

Net Operating Income 234,000    44,000    604,000

Minimum required return (WACC)    10%    10% 10%

Cost of Operating Assets (FA + CA) 1,100,000    700,000    2,000,000

C O A x Minimum required return    110,000    70,000    200,000

therefore,

Residual Income =    124,000    (26,000)    404,000