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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Return on investment

 The Walt Disney Company has four profitable business segments, described as follows;

 • Media Networks: The ABC television and radio network, Disney channel, ESPN, A&E, E!, and Disney.com

 • Parks and Resorts: Wall Disney World Resort. Disneyland, Disney Cruise Line, and oilier resort properties

 • Studio Entertainment: Walt Disney Studios, which releases films by Pixar Animation Studios, Marvel Studios, Disney/Lucasfilm, and Touchstone Pictures

 • Consumer Products: Character merchandising, Disney stores, books, and magazines Disney recently reported sector income from operations, revenue, and invested assets (in millions) as follows:

 

Income from

Operations

Revenue

Invested

Assets

Media Networks $7,321 $21,152 $29,887
Parks and Resorts 2,663 15,099 23,335
Studio Entertainment 1,549 6,988 15,155
Consumer Products 1,356 4,274 7,526

 a. Use the DuPont formula to determine the return on investment for the four Disney sectors. Hound whole percents to one decimal place and investment turnover to two decimal places.

 b. How do the four sectors differ in their profit margin, investment turnover, and return on investment?

(a)

To determine

Profit margin: This ratio gauges the operating profitability by quantifying the amount of income earned from business operations from the sales generated.

Formula of profit margin:

Profit margin=Income from operationsSales

Investment turnover: This ratio gauges the operating efficiency by quantifying the amount of sales generated from the assets invested.

Formula of investment turnover:

Investment turnover=SalesInvested assets

Return on investment (ROI): This financial ratio evaluates how efficiently the assets are used in earning income from operations. So, ROI is a tool used to measure and compare the performance of a units or divisions or a companies.

Formula of ROI according to Dupont formula:

Return on investment = Profit margin × Investment turnover=Income from operationsSales×SalesInvested assets=Income from operationsInvested assets

To determine: Return on investment of MN Segment, PR Segment, SE Segment, and CP Segment, using Dupont formula

Explanation

Determine ROI of MN Segment, if income from operations is $7,321,000,000, sales are $21,152,000,000, and assets invested are $29,887,000,000.

Return on investment =          Profit margin         ×    Investment turnover=Income from operationsSales×SalesInvested assets=$7,321,000,000$21,152,000,000×$21,152,000,000$29,887,000,00034.6% ×0.71= 24.5%

Determine ROI of PR Segment, if income from operations is $2,663,000,000, sales are $15,099,000,000, and assets invested are $23,335,000,000.

Return on investment =          Profit margin         ×    Investment turnover=Income from operationsSales×SalesInvested assets=$2,663,000,000$15,099,000,000×$15,099,000,000$23,335,000,00017.6% ×0.65= 11.4%

Determine ROI of SE Segment, if income from operations is $1,549,000,000, sales are $6,988,000,000, and assets invested are $15,555,000,000

(b)

To determine

To explain: The differences in profit margin, investment turnover, and return on investment of MN Segment, PR Segment, SE Segment, and CP Segment

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