Hope and Co. is a multi-divisional marketing firm. The performance of divisions is evaluated using financial metrics such as ROI, Residual Income and EVA. For the year ended June 30, 2020, Hope's CEO received the following information about the performance of the sports marketing division: Sales Revenues $950,000 Operating Income $275,000 Total Assets $1,750,000 Current Liabilities $325,000 Debt (interest rate: 4%) $450,000 Common equity (book value) $550,000 For divisional performance evaluation Hope defined investment as total assets and income as operating income i.e. income before interest and taxes. Hope pays a flat rate of 20% in taxes on income. (a) What was the Sports Marketing division's ROI for the year? (2 decimal places) (b) Based on Hope's required rate of return of 6% what was the residual income for the 2020 year? (2 decimal places) (c) Hope's debt trades at book value while its equity has a market value approximately 140% of its book value. The company's cost of equity capital is 12%. Calculate the EVA for the Sports marketing division. (2 decimal places) (d) Explain whether you believe the Sports Marketing manager has performed well based on these financial performance measures. (e) The CEO of Hope is thinking of paying the Sports Marketing Division manager solely based on these financial performance measures with no base salary. Is this a good idea?
Q1
Hope and Co. is a multi-divisional marketing firm. The performance of divisions is evaluated using financial metrics such as ROI, Residual Income and EVA. For the year ended June 30, 2020, Hope's CEO received the following information about the performance of the sports marketing division:
|
Sales Revenues |
$950,000 |
|
Operating Income |
$275,000 |
|
Total Assets |
$1,750,000 |
|
Current Liabilities |
$325,000 |
|
Debt (interest rate: 4%) |
$450,000 |
|
Common equity (book value) |
$550,000 |
For divisional performance evaluation Hope defined investment as total assets and income as operating income i.e. income before interest and taxes. Hope pays a flat rate of 20% in taxes on income.
(a) What was the Sports Marketing division's ROI for the year? (2 decimal places)
(b) Based on Hope's required
(c) Hope's debt trades at book value while its equity has a market value approximately 140% of its book value. The company's
(d) Explain whether you believe the Sports Marketing manager has performed well based on these financial performance measures.
(e) The CEO of Hope is thinking of paying the Sports Marketing Division manager solely based on these financial performance measures with no base salary. Is this a good idea?
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