Question

IFIX AUTO Inc. allows its divisions to operate as autonomous units. Their results for the current year were as follows:

	Consumer	Commercial	Truck
Revenues	$1,650,000	$900,000	$5,800,000
Current assets	210,000	152,500	419,000
Capital assets	870,000	630,000	1,590,000
Current liabilities	275,000	127,000	399,000
Net operating income	235,000	70,000	560,000
After-tax income	186,000	55,404	443,234
Weighted average cost of capital	9.5%	9.5%	9.5%

Required:

For each division compute the

a. return on sales

b. return on investment based on total assets employed

c. economic value added

d. residual income based on net operating income

Answer 1

	Consumer	Commercial	Truck
a. Return on sales [ After tax income / Revenues ]	11.3%	6.2%	7.6%
b. return on investment based on total assets employed [ After tax income / ( Current assets + Capital assets ) ]	17.2%	23.8%	9.3%
c. economic value added [ After tax income - [ (Current assets + Capital assets - Current liabilities)*WACC ]	109525.0	123727.5	33050.0
d. residual income based on net operating income [ Net operating income - [ WACC* (Current assets + Capital assets) ]	132400.0	-4337.5	208145.0

If you have any doubt then please ask

Please do rate the answer