Horngren's Cost Accounting, Student Value Edition Plus MyLab Accounting with Pearson eText - Access Card Package (16th Edition)
16th Edition
ISBN: 9780134642468
Author: Srikant M. Datar, Madhav V. Rajan
Publisher: PEARSON
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Textbook Question
Chapter 23, Problem 23.25E
| Sales revenues | $ 900,000 |
| Operating income | 225,000 |
| Total assets | 1,500,000 |
| Current liabilities | 300,000 |
| Debt (interest rate: 5%) | 400,000 |
| Common equity (book value) | 500,000 |
For the purposes of divisional performance evaluation, Hamilton defines investment as total assets and income as operating income (that is, income before interest and taxes). The firm pays a flat rate of 25% in taxes on its income.
- 1. What was the net income after taxes of the property/casualty division?
Required
- 2. What was the division’s ROI for the year?
- 3. Based on Hamilton’s required
rate of return of 8%, what was the property/casualty division’s residual income for 2017? - 4. Hamilton’s CFO has heard about EVA and is curious about whether it might be a better measure to use for evaluating division managers. Hamilton’s four divisions have similar risk characteristics. Hamilton’s debt trades at book value while its equity has a market value approximately 150% that of its book value. The company’s
cost of equity capital is 10%. Calculate each of the following components of EVA for the property/casualty division, as well as the final EVA figure:- a.
Net operating profit after taxes - b. Weighted-average cost of capital
- c. Investment, as measured for EVA calculations
- a.
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Chapter 23 Solutions
Horngren's Cost Accounting, Student Value Edition Plus MyLab Accounting with Pearson eText - Access Card Package (16th Edition)
Ch. 23 - Prob. 23.1QCh. 23 - Prob. 23.2QCh. 23 - What factors affecting ROI does the DuPont method...Ch. 23 - RI is not identical to ROI, although both measures...Ch. 23 - Describe EVA.Ch. 23 - Give three definitions of investment used in...Ch. 23 - Distinguish between measuring assets based on...Ch. 23 - Prob. 23.8QCh. 23 - Why is it important to distinguish between the...Ch. 23 - Prob. 23.10Q
Ch. 23 - Managers should be rewarded only on the basis of...Ch. 23 - Explain the role of benchmarking in evaluating...Ch. 23 - Explain the incentive problems that can arise when...Ch. 23 - Prob. 23.14QCh. 23 - Prob. 23.15QCh. 23 - During the current year, a strategic business unit...Ch. 23 - Assuming an increase in price levels over time,...Ch. 23 - If ROI Is used to evaluate a managers performance...Ch. 23 - The Long Haul Trucking Company is developing...Ch. 23 - ABC Inc. desires to maintain a capital structure...Ch. 23 - ROI, comparisons of three companies. (CMA,...Ch. 23 - Prob. 23.22ECh. 23 - ROI and RI. (D. Kleespie, adapted) The Sports...Ch. 23 - ROI and RI with manufacturing costs. Excellent...Ch. 23 - ROI, RI, EVA. Hamilton Corp. is a reinsurance and...Ch. 23 - Goal incongruence and ROI. Comfy Corporation...Ch. 23 - ROI, RI, EVA. Performance Auto Company operates a...Ch. 23 - Capital budgeting, RI. Ryan Alcoa, a new associate...Ch. 23 - Prob. 23.29ECh. 23 - ROI, RI, EVA, and performance evaluation. Cora...Ch. 23 - Prob. 23.31ECh. 23 - Prob. 23.32ECh. 23 - ROI performance measures based on historical cost...Ch. 23 - ROI, measurement alternatives for performance...Ch. 23 - Multinational firms, differing risk, comparison of...Ch. 23 - ROI, Rl, DuPont method, investment decisions,...Ch. 23 - Division managers compensation, levers of control...Ch. 23 - Executive compensation, balanced scorecard. Acme...Ch. 23 - Financial and nonfinancial performance measures,...Ch. 23 - Prob. 23.40PCh. 23 - Prob. 23.41PCh. 23 - RI, EVA, measurement alternatives, goal...
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