QUESTION 7 Tries remaining Points out of 2000P Flag question

QUESTION 7 Tries remaining: Points out of 20.00P Flag 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 (S thousands): Software Division Consulting Division Venture Capital Division (Value Base) (Value Base) (Value Base) Book Current Book Current Current Sales ncome 12,250 11,700 16,400 20,020 Assets Liabilities 10,000 10,000 4,000 14,000 $100,000 $100,000 $200,000 $200,000 $800,000 800,000 51,920 70,000 90,000 100,000 110,000 610,000 590,000 40,000 56,730 40,000 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 13 Consulting Venture Capital 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 70,000 Consulting Venture Capital

Solution

Software Division Consulting Division Venture Capital Division (Value Base) (Value Base) (Value Base) Book Current Book Current Book Current Sales $100,000 $100,000 $200,000 $200,000 $800,000 $800,000 Income 12,250 11,700 16,400 20,020 56,730 51,920 Assets 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 Return on investment = Net Income/Cost of investment or Total Assets Book Value Current Value Hint Software Division                0.175                   0.130 12250/70000; 11700/90000 Consulting Division                0.164                   0.182 16400/100000; 20020/110000 Venture Capital Division                0.093                   0.088 56730/610000; 51920/590000 Residual Income = Net Income - Investment*rate of return Book Value Current Value Hint Software Division                3,850                      900 12250-70000 x 12%; 11700 - 90000 x 12% Consulting Division                4,400                   6,820 Venture Capital Division           (16,470)              (18,880) Economic value added = Income net of tax - Equity x WACC Book Value Current Value Hint Software Division                2,575                      190 12250*(1-0.30)-(70000-10000)x10% 11700*(1-0.30)-(90000-10000)x10% Consulting Division                2,880                   4,414 Venture Capital Division           (17,289)              (18,656)