ROI, Residual Income, and EVA® Gordon Distributors has three operating divisions that are defined by geographical regions. The financial results for the most recent year are shown below. The firm’s total assets using generally accepted accounting principles (GAAP) are shown at net book value (NBV). Gordon uses a minimum desired rate of return of 12 percent for selecting new projects and for evaluating the three divisions using residual income (RI). The firm’s weighted-average cost of capital is 8 percent.
Region | Net Operating Income | Net Book Value (NBV) | NBV Plus Intangibles |
Eastern | $35,440 | $195,500 | $225,600 |
Central | 41,000 | 212,000 | 233,000 |
Western | 23,600 | 133,000 | 135,000 |
(All figures in thousands) | |||
Required
1. Calculate the ROI for each division.
2. Calculate the RI for each division.
3. Gordon has estimated the amount of intangibles that are not recorded on the firm’s financial statements using generally accepted accounting principles and has included that additional information above. Assume that adjusting for the unrecorded intangibles would increase net operating income of the Eastern, Central, and Western divisions by $22,000, $15,000, and $1,500, respectively, after tax. Determine the EVA® for each division.
4. Compare and interpret the differences between your answers in parts 1, 2, and 3.
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