Company Analysis : Enager Industries, Inc.

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Enager Industries, Inc. is a relatively young, conglomerate company with three main operating divisions. Conglomerates, also known as unrelated diversified firms, are a unique type of firm because they function in a number of different industries, causing there to be few operating synergies across business divisions. (57) The Consumer Products Division focuses on the design, marketing, and manufacture of a houseware items product line. The Industrial Products Division manufactures custom made machine tools and has typical job processing time of several months. Finally, Enager’s third division, the Professional Services Division, was created with the company acquired a large firm that dealt with land planning, landscape architecture, and…show more content…
(287) Due to Enager’s degree of unrelated divisions, the 15% target return for all proposals is unreasonable; therefore, the decision to approve the product requires more detailed analysis. Rather than using a gross measure of ROA, the ratio should be evaluated at the divisional level. For example, the Consumer Products Division reported ROA of 10.8% in 1993. Since the product proposal’s 13% ROA exceeds the current ROA for the division, approval of the investment would be advantageous because it would likely help pull the division’s gross ROA up towards the target rate set by management. In this manner, McNeil’s proposal should be accepted because of the potential value added specifically to the Consumer Products Division. While ROA is more widely used in practice, Enager could also use the economic value added (EVA) measure for decision-making. EVA for the proposal would be calculated as follows: As a result, investing in the proposal would generate $30,000 of positive residual income. The principal benefit of using EVA rather than ROA is that it has a stronger, positive correlation with changes in a firm’s market value. (300) The “true value” perspective of EVA here suggests that Enager’s investment in the proposal would ultimately increase the company’s market value by $30,000.

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