Calculate the economic value added (EVA)

Complete exercise 12-33 (part 1 only), exercise 13-29 (parts 1 and 2 only), exercise 13-27, and exercise 13-28 in the textbook. Prepare your responses to…

Complete exercise 12-33 (part 1 only), exercise 13-29 (parts 1 and 2 only), exercise 13-27, and exercise 13-28 in the textbook. Prepare your responses to in Excel with each problem on a separate tab. Exercise 12–33 Segmented Income Statement; TV Cable Company Countywide Cable Services, Inc. is organized with three segments: Metro, Suburban, and Outlying. Data for these segments for the year just ended follow. Metro Suburban Outlying Service revenue …$1,000,000 $800,000 $400,000 Variable expenses 200,000 150,000 100,000 Controllable fixed expenses ……..400,000 320,000 150,000 Fixed expenses controllable by others 230,000 200,000 90,000 In addition to the expenses listed above, the company has $95,000 of common fixed expenses. Income-tax expense for the year is $145,000. Required: 1. Prepare a segmented income statement for Countywide Cable Services, Inc. Use the contribution format. 2. Build a spreadsheet: Construct an Excel spreadsheet to solve the preceding requirement. Show how the solution will change if the following information changes: the sales revenues were $950,000 and $815,000 for Metro and Suburban, respectively. Exercise 13–29 ROI; Residual Income Wyalusing Industries has manufactured prefabricated houses for over 20 years. The houses are con-structed in sections to be assembled on customers’ lots. Wyalusing expanded into the precut housing mar-ket when it acquired Fairmont Company, one of its suppliers. In this market, various types of lumber are precut into the appropriate lengths, banded into packages, and shipped to customers’ lots for assembly. Wyalusing designated the Fairmont Division as an investment center. Wyalusing uses return on invest-ment (ROI) as a performance measure with investment defined as average productive assets. Management bonuses are based in part on ROI. All investments are expected to earn a minimum return of 15 percent before income taxes. Fairmont’s ROI has ranged from 19.3 to 22.1 percent since it was acquired. Fairmont had an investment opportunity in 20×1 that had an estimated ROI of 18 percent. Fairmont’s management decided against the investment because it believed the investment would decrease the division’s overall ROI. The 20×1 income statement for Fairmont Division follows. The division’s productive assets were $12,600,000 at the end of 20×1, a 5 percent increase over the balance at the beginning of the year. FAIRMONT DIVISION Income Statement For the Year Ended December 31, 20×1(in thousands) Sales revenue 24,000 Cost of goods sold 15,800 Gross margin $ 8,200 Operating expenses: Administrative 2,140 Selling 3,600 5,740 Income from operations before income taxes … $ 2,460 Required: 1. Calculate the following performance measures for 20×1 for the Fairmont Division. a. Return on investment (ROI). b. Residual income. 2. Would the management of Fairmont Division have been more likely to accept the investment opportunity it had in 20×1 if residual income were used as a performance measure instead of ROI? Explain your answer. 3. Build a spreadsheet: Construct an Excel spreadsheet to solve requirement (1) above. Show how the solution will change if income from operations was $2,700,000. Exercise 13–27 Calculate Weighted-Average Cost of Capital for EVA Golden Gate Construction Associates, a real estate developer and building contractor in San Francisco, has two sources of long-term capital: debt and equity. The cost to Golden Gate of issuing debt is the after-tax cost of the interest payments on the debt, taking into account the fact that the interest payments are tax deductible. The cost of Golden Gate’s equity capital is the investment opportunity rate of Golden Gate’s investors, that is, the rate they could earn on investments of similar risk to that of investing in Golden Gate Construction Associates. The interest rate on Golden Gate’s $60 million of long-term debt is 10 percent, and the company’s tax rate is 40 percent. The cost of Golden Gate’s equity capital is 15 percent. Moreover, the market value (and book value) of Golden Gate’s equity is $90 million. Required: Calculate Golden Gate Construction Associates’ weighted-average cost of capital. Exercise 13–28 Economic Value Added (EVA); Continuation of Preceding Exercise Refer to the data in the preceding exercise for Golden Gate Construction Associates. The company has two divisions: the real estate division and the construction division. The divisions’ total assets, current liabilities, and before-tax operating income for the most recent year are as follows: Division Total Assets Current Liabilities Before-Tax Operating Income Real estate $100,000,000 $6,000,000 $20,000,000 Construction …. 60,000,000 4,000,000 18,000,000 Required: Calculate the economic value added (EVA) for each of Golden Gate Construction Associ-ates’ divisions. (You will need to use the weighted-average cost of capital, which was computed in the preceding exercise.)
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