EBK HORNGREN'S COST ACCOUNTING
16th Edition
ISBN: 8220103631723
Author: Rajan
Publisher: YUZU
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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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Hamilton Corp. is a reinsurance and financial services company. Hamilton strongly believes in evaluating the performance of its stand-alone divisions using financial metrics such as ROI and residual income. For the year ended December 31, 2017, Hamilton’s CFO received the following information about the performance of the property/casualty division:
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.
Q. 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…
Hamilton Corp. is a reinsurance and financial services company. Hamilton strongly believes in evaluating the performance of its stand-alone divisions using financial metrics such as ROI and residual income. For the year ended December 31, 2017, Hamilton’s CFO received the following information about the performance of the property/casualty division:
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.
Q. What was the net income after taxes of the property/casualty division?
Hamilton Corp. is a reinsurance and financial services company. Hamilton strongly believes in evaluating the performance of its stand-alone divisions using financial metrics such as ROI and residual income. For the year ended December 31, 2017, Hamilton’s CFO received the following information about the performance of the property/casualty division:
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.
Q. Based on Hamilton’s required rate of return of 8%, what was the property/casualty division’s residual income for 2017?
Chapter 23 Solutions
EBK HORNGREN'S COST ACCOUNTING
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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