Question

9. Smith Company reports the following information:

Net operating profit after taxes $500,000
Adjusted net operating profit after taxes $650,000
Average invested capital $500,000
Adjusted average invested capital $550,000
After-tax cost of capital 10%

The adjusted figures reflect adjustments used by Stern Stewart & Company. What is the EVA for Sanchez Company?
A) $430,000
B) $450,000
C) $600,000
D) $595,000

10. Juan Company's after-tax operating income was $882 million. Average total assets were $5,900 million and average total stockholders' equity was $4,050 million. Juan Company's cost of capital was 10%. Juan Company uses total assets as the measure of invested capital. What is Juan Company's residual income?
A) $187 million
B) $292 million
C) $477 million
D) $667 million

11. Julie Company's revenues for the year are $300 and average invested capital for the year is $240. Expenses are currently 50% of revenues. Julie Company's current return on investment is ________.
A) 50%
B) 62.5%
C) 80%
D) 100%

Answer 1

9.

Adjusted net operating profit after taxes = $650,000

Adjusted average invested capital = $550,000

After-tax cost of capital = 10%

Economic value added (EVA) = Adjusted net operating profit after taxes - Cost of capital

= 650,000 - (550,000 x 10%)

= 650,000 - 55,000

= $595,000

Correct option is (D)

10.

Residual income = After-tax operating income - Cost of capital invested

= 882 - 5,900 x 10%

= 882 - 590

= $292 million

Correct option is (B)

11.

Julie Company's revenues for the year are $300 and average invested capital for the year is $240. Expenses are currently 50% of revenues

Expenses = 300 x 50%

= $150 million

Net income = Revenue - Expenses

= 300 - 150

= $150 million

Return on investment = Net income/Average invested capital

= 150/240

= 62.5%

Correct option is (B)

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