Chapter 23, Problem 23.35P

Multinational firms, differing risk, comparison of profit, ROI, and RI. Newmann, Inc. has divisions in the United States, France, and Australia. The U.S. division is the oldest and most established of the three and has a cost of capital of 6%. The French division was started four years ago when the exchange rate for the Euro was 1 Euro = $1.34 USD. The French division has a cost of capital of 8%. The division in Australia was started this year, when the exchange rate was 1 Australian Dollar (AUD) = $.087 USD. Its cost of capital is 11%. Average exchange rates for the current year are 1 euro = $1.07 and 1 AUD = $0.74 USD. Other information for the three divisions includes:

1. 1. Translate the French and Australian information into dollars to make the divisions comparable. Find the after-tax operating income for each division and compare the profits.

Required

1. 2. Calculate ROI using after-tax operating income. Compare among divisions.
2. 3. Use after-tax operating income and the individual cost of capital of each division to calculate residual income and compare.
3. 4. Redo requirement 2 using pretax operating income instead of net income. Why is there a big difference, and what does this mean for performance evaluation?