The following data are available for two divisions of Ryan Enterprises: Alpha Division Beta Division Division operating profit $ 7,360,000 $ 1,240,000 Division investment 32,160,000 3,160,000 The cost of capital for the company is 7 percent. Ignore taxes.
The following data are available for two divisions of Ryan Enterprises: Alpha Division Beta Division Division operating profit $ 7,360,000 $ 1,240,000 Division investment 32,160,000 3,160,000 The cost of capital for the company is 7 percent. Ignore taxes.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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The following data are available for two divisions of Ryan Enterprises:
| Alpha Division | Beta Division | |
|---|---|---|
| Division operating profit | $ 7,360,000 | $ 1,240,000 |
| Division investment | 32,160,000 | 3,160,000 |
The cost of capital for the company is 7 percent. Ignore taxes.
Required:
a-1. Calculate the
a-2. If Ryan measures performance using ROI, which division had the better performance?
b-1. Calculate the EVA for both Alpha and Beta divisions. (The divisions have no current liabilities.)
b-2. If Ryan measures performance using economic value added, which division had the better performance?
c. Would your evaluation change if the company’s cost of capital was 10 percent,
-
when evaluated by ROI?
-
when evaluated by EVA?
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Step 1: Ratio analysis:
VIEWStep 2: (a.1) Calculate the ROI for both Alpha and Beta divisions:
VIEWStep 3: (a.2) Determine the division that is performing better based on ROI:
VIEWStep 4: (b.1) Calculate the EVA for both Alpha and Beta divisions:
VIEWStep 5: (b.2) Determine the division that is performing better based on EVA:
VIEWStep 6: (c) Determine the change if the company’s cost of capital was 10 percent:
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