EBK INVESTMENTS
11th Edition
ISBN: 9781259357480
Author: Bodie
Publisher: MCGRAW HILL BOOK COMPANY
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Chapter 18, Problem 7CP
Summary Introduction
To calculate: It is to be determined that which given factors will cause the
Introduction: The
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A diversified company has decided to use its overall firm WACC as a performance benchmark for rating its divisional managers and to decide whether new projects from its three divisions should be funded for investment capital. The firm WACC is 10%. The divisional WACCs for its high risk, average risk, and low risk divisions are 16%, 10%, and 8%, respectively. Please explain: (a) What will happen to the firm's overall risk and market value if the firm WACC (10%) is used to evaluate projects and managers of high risk division; (b) What will happen to the firm's overall risk and market value if the firm WACC (10%) is used to evaluate projects and managers of low risk division; and (c) How would managers of high-risk and low-risk divisions react to using firm WACC as a performance benchmark for managers and divisional investment projects.
Using ROI and RI to evaluate investment centers
Consider the following condensed financial statements of Forever Free, Inc. The Company’s target fate of return is 40%
Requirements
Calculate the company’s ROI. Round all of your answers to four decimal places.
Calculate the company’s profit margin ratio. Interpret your results.
Calculate the company’s asset turnover ratio. Interpret your results.
Use the expanded ROI formula to confirm your results from Requirement 1. Interpret your results.
Calculate the company’s RI. Interpret your results.
Below is a list of various metrics used to measure performance. For each metric, identify the correct balanced scorecard perspective with which the metric is associated.
Metric
Balanced Scorecard Perspective
Average stock price
Economic value added
Employee turnover rates
Manufacturing cycle time
Market share
Number of days from product launch to shelf
Number of defects
Number of new patent applications
Percentage of repeat customers
Percentage decrease in operating costs
Percentage of sales generated by new products
Research and development spending as a percentage of net revenues
options:
Customer
Financial
Internal Business
Learning and Growth
Chapter 18 Solutions
EBK INVESTMENTS
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- Managers from different departments in Bensen Systems, a large multinational corporation, have offered seven projects for consideration by the corporate office. A staff member for the chief financial officer used key words to identify the projects and then listed them in order of projected rate of return as shown below. If the company wants to grow rapidly through high leverage and uses only 5% equity financing that has a cost of equity capital of 10% and 95% debt financing with a cost of debt capital of 19%, which projects should the company undertake? Project ID Projected ROR, % per year Inventory 30.0 Technology 28.4 Warehouse 21.9 Maintenance 19.5 Products 13.1 Energy 9.6 Shipping 8.2arrow_forwardGohwaT has a client who has inquired about the valuation method best suited for comparison of companies in an industry that has the following characteristics:• Principal competitors within the industry are located in the United States, France, Japan, and Brazil.• The industry is currently operating at a cyclical low, with many firms reporting losses.• The industry is subjected to rapid technological change.His advisor recommends that the client consider the following valuation ratios:1. Price to earnings2. Price to book value3. Price to salesDetermine which one of the three valuation ratios is most appropriate for comparing companies in this industry. Support your answer with two reasons that make that ratio superior to either of the other two ratios.arrow_forward72 Inc. has developed a balanced scorecard with the following performance metrics: Total sales Employee turnover Market share Number of shipping errors Median training hours per employee Number of new customers Relative to the metric customer satisfaction ratings, which of these performance metrics are leading indicators and which are lagging indicators?arrow_forward
- Investment advisors estimated the stock market returns for four market segments: computers, financial, manufacturing, and pharmaceuticals. Annual return projections vary depending on whether the general economic conditions are improving, stable, or declining. The anticipated annual return percentages for each market segment under each economic condition are as follows: Assume that an individual investor wants to select one market segment for a new investment. A forecast shows improving to declining economic conditions with the following probabilities: improving (0.2), stable (0.5), and declining (0.3). What is the preferred market segment for the investor, and what is the expected return percentage? At a later date, a revised forecast shows a potential for an improvement in economic conditions. New probabilities are as follows: improving (0.4), stable (0.4), and declining (0.2). What is the preferred market segment for the investor based on these new probabilities? What is the expected return percentage?arrow_forwardm. Jana is interested in establishing a new division that will focus primarily on developing new Internet-based projects. In trying to determine the cost of capital for this new division, you discover that specialized firms involved in similar projects have, on average, the following characteristics: Their capital structure is 10% debt and 90% common equity; their cost of debt is typically 12%; and they have a beta of 1.7. Given this information, what would your estimate be for the new divisions cost of capital?arrow_forwardEvaluate the two departments for Moxie Products. Compare the years performance of the two departments in terms of ROI and RI. Which department has created the most wealth for Moxie shareholders in the past year?arrow_forward
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