Operating Income For Segments
Home Restaurant Specialty
Sales 4,140.00$ 3,600.00$ 2,520.00$
Cost of goods sold 2,900.00$ 2,640.00$ 1,700.00$
Selling and administrative expenses 950.00$ 410.00$ 320.00$
Tax Rate 40%
Bonds 5% interest
Risk free rate 4%
Xenold opportunity cost 5%
Total capital employed 5,040,000.00$
Home Division, $ 2,600,000.00 Equity
Restaurant Division $ 1,700,000.00
Specialty Division $ 740,000.00
Required:
1. Prepare a segmented income statement for Xenold, Inc., for last year. Enter the amounts in thousands.
Xenold, Inc.
Home Restaurant Specialty Total
Sales 4,140.00$ 3,600.00$ 2,520.00$ 10,260.00$
Cost of goods sold 2,900.00$ 2,640.00$ 1,700.00$ 7,240.00$
Gross profit 1,240.00$ 960.00$ 820.00$ 3,020.00$
Selling and administrative expense 950.00$ 410.00$ 320.00$ 1,680.00$
Division profit 290.00$ 550.00$ 500.00$ 1,340.00$
Income taxes 116.00$ 220.00$ 200.00$ 536.00$
After-tax income 174.00$ 330.00$ 300.00$ 804.00$
WACC = (E/V)*re+(D/V)*rd(1-TC) 0.075
WHERE
re = cost of equity 9.00% is risk free rate + beta(opportunity cost of debt)
rd= cost of debt
E= Market value of equity
D=market value of Debt
E/V= % financing that is equity 0.75
D/V= % financing that is debt 0.25
TC= Corporate tax rate 0.40
EVA= NET OPERATING INVOME AFTER TAX – (CAPITAL EMPLOYED * WACC)
$ 174,000.00 $330,000.00 $300,000.00
EVA
Home (21,000.00)$
Restaurant 202,500.00$
Specialty 244,500.00$
Total 426,000.00$
Feedback
2. Calculate Xenold‘s weighted average cost of capital. Enter your answer as a decimal value rounded to three places. For example, 4.36% would be entered as
“.044”. Round your calculations to four decimal places.
3. Calculate EVA for each division and for Xenold, Inc. In your computations, carry the weighted average cost of capital to three decimal places. If the EVA is
negative, enter your answer as a negative amount. Enter amounts as whole dollars not in thousands.
2. The sources of invested funds must be proportionally weighed. Once the weights for each source have been determined, the weights are then
multiplied by their after-tax cost. This will provide each source’s weighted cost. Add all the weighted costs together to determine the weighted
3.TocalculateEVA,firstcalculatetheafter-taxcost.After-taxcost=Interestrate–(TaxratexInterestRate).EVA=After-taxoperatingincome–
(Weighted average cost of capital x Total capital employed).
Xenold, Inc., manufactures and sells cooktops and ovens through three divisions: Home, Restaurant, and Specialty. Each division is evaluated as a profit center.
Data for each division for last year are as follows (numbers in thousands):
The income tax rate for Xenold, Inc., is 40 percent. Xenold, Inc., has two sources of financing: bonds paying 5 percent interest, which account for 25 percent of total
investment, and equity accounting for the remaining 75 percent of total investment. Xenold, Inc., has been in business for over 15 years and is considered a relatively
stable stock, despite its link to the cyclical construction industry. As a result, Xenold stock has an opportunity cost of 5 percent over the 4 percent long-term government
bond rate. Xenold’s total capital employed is $5.04 million ($2,600,000 for the Home Division, $1,700,000 for the Restaurant Division, and the remainder for the Specialty
Division).
Income Statement (in thousands)
For the Year 20XX
Calculating Average Operating Assets, Margin, Turnover, Return on Investment (ROI)
Forchen, Inc., provided the following information for two of its divisions for last year:
Small Appliances Cleaning Products
Division Division
Sales 41,604,000.00$ 29,000,000.00$
Operating income 3,328,320.00$ 870,000.00$
Operating assets, January 1 6,394,000.00$ 5,600,000.00$
Operating assets, December 31 7,474,000.00$ 6,000,000.00$
Required:
1. For the Small Appliances Division, calculate:
a. Average operating assets 6,934,000.00$
is Beg assets – ending assets/2
b. Margin 8%
Operating Income/ Sales
c. Turnover
sales/ avg operating assets 6
d. ROI 48%
ROI = Operating Income / Average Operating Assets
