Washington Company has two divisions: the Adams Division and the Jefferson Division. The following information pertains to last year's results: Adams Division Jefferson Division Net (after-tax) income $641,300 $378,000 Total capital employed 4,200,000 3,282,500 Washington's actual cost of capital was 12%. Required: 1. Calculate the EVA for the Adams Division. If required, enter a negative EVA as a negative number by entering your answer with the minus sign. 2. Calculate the EVA for the Jefferson Division. If required, enter a negative EVA as a negative number by entering your answer with the minus sign. 3. Conceptual Connection: Is each division creating or destroying wealth? Adams Division Jefferson Division 4. Describe generally the types of actions that Washington’s management team could take to increase Jefferson Division’s EVA? Increase the after-tax operating profit that is generated from using the same amount of invested capital. Continue to generate the same after-tax operating profit but use less capital to do so. Continue to generate the same after-tax operating profit using the same amount of capital, but with a lower cost of capital. Decrease the after-tax operating profit that is generated from using the same amount of invested capital. Continue to generate the same after-tax operating profit but use more capital to do so.

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

Washington Company has two divisions: the Adams Division and the Jefferson Division. The following information pertains to last year's results:

Washington's actual cost of capital was 12%.

Required:

1. Calculate the EVA for the Adams Division. If required, enter a negative EVA as a negative number by entering your answer with the minus sign.

2. Calculate the EVA for the Jefferson Division. If required, enter a negative EVA as a negative number by entering your answer with the minus sign.

3. Conceptual Connection: Is each division creating or destroying wealth?

Adams Division
Jefferson Division

4. Describe generally the types of actions that Washington’s management team could take to increase Jefferson Division’s EVA?

Increase the after-tax operating profit that is generated from using the same amount of invested capital.
Continue to generate the same after-tax operating profit but use less capital to do so.
Continue to generate the same after-tax operating profit using the same amount of capital, but with a lower cost of capital.
Decrease the after-tax operating profit that is generated from using the same amount of invested capital.
Continue to generate the same after-tax operating profit but use more capital to do so.

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