69 coptermagic company supplies helicopters to corporate clients coptermagic has two 4309283

69) Coptermagic Company supplies helicopters to corporate clients. Coptermagic has two sources of funds: long term debt with a market and book value of $32 million issued at an interest rate of 10%, and equity capital that has a market value of $18 million (book value of $8 million). The cost of equity capital for Coptermagic is 15%, and its tax rate is 30%. Coptermagic has profit centers in four divisions that operate autonomously. The company's results for 2008 are as follows:

	Operating Income	Assets	Current Liabilities
New York	$1,750,000	$11,500,000	$2,500,000
Chicago	2,400,000	9,000,000	3,500,000
Dalllas	4,675,000	27,500,000	9,500,000
Los Angeles	4,200,000	25,000,000	8,000,000

Required:

a.Compute Coptermagic's weighted average cost of capital.

b.Compute each division's Economic Value Added.

c.Rank the divisions by EVA.

70) Bob's Cellular Phone Company uses ROI to measure divisional performance. Annual ROI calculations for each division have traditionally employed the ending amount of invested capital along with annual operating income and net revenue. The Dupont method is generally used. The company's Phone Accessories Division had the following results for the last two years:

20X5 ROI = ($2,000,000/$20,000,000) × ($20,000,000/$10,000,000) = 0.20

20X6 ROI = ($2,400,000/$25,000,000) × ($25,000,000/$15,000,000) = 0.16

Corporate management was disappointed in the performance of the division for 20X6, since it had made an additional investment in the division that was budgeted for a 23% ROI.

Required:

a.Discuss some factors that may have contributed to the decrease in ROI for 20X6.

b.Would there have been any substantial difference if average capital had been used?

71) The economic value added concept has attracted considerable attention in recent years. Explain the attractiveness of this number as a measure of performance.

Answer the following questions using the information below:

Ruth Cleaning Products manufactures home cleaning products. The company has two divisions, Bleach and Cleanser. Because of different accounting methods and inflation rates, the company is considering multiple evaluation measures. The following information is provided for 20X5:

	ASSETS		INCOME
	Book value	Current value	Book value	Current value
Bleach	$225,000	$300,000	$150,000	$155,000
Cleanser	$450,000	$250,000	$100,000	$105,000

The company is currently using a 15% required rate of return.

1) What are Bleach's and Cleanser's return on investment based on book values, respectively?

A) 0.22; 0.67

B) 0.42; 0.52

C) 0.52; 0.42

D) 0.67; 0.22

2) What are Bleach's and Cleanser's return on investment based on current values, respectively?

A) 0.22; 0.67

B) 0.42; 0.52

C) 0.52; 0.42

D) 0.67; 0.22

3) What are Bleach's and Cleanser's residual incomes based on book values, respectively?

A) $116,250; $32,500

B) $110,000; $67,500

C) $67,500; $110,000

D) $37,500; $116,250