For fiscal year 2017, LaundryMate Products had income as follows:
55,000,000$
38,400,000$
Selling and administrative expense 5,700,000
1,000,000 45,100,000
9,900,000
3,465,000
6,435,000$
Other pertinent information for 2017 follows:
Total assets 97,000,000$
Noninterest-bearing current liabilities 3,200,000
Required rate of return on invested capital 10%
Required
Calculate NOPAT, invested capital, and ROI for LaundryMate Products.
Income tax rate = ÷ =
NOPAT = + [ × ( )] =
Invested capital =
―=
ROI =
Comment on the company’s profitability.
What-if?
Consider the following after you have completed the requirements of E12-8.
NOPAT = + [ × ( )] =
Less income taxes
Net income
=
Suppose LaundryMate Products had $11,000,000 of fully depreciated equipment of which
it decided to dispose. Calculate ROI after the disposal of the equipment.
Income before taxes
Exercise 12-8 Calculating ROI
Sales
Less:
Cost of goods sold
Interest expense
Adjusted invested capital =
―=
New ROI =
What incentives might a manager have to dispose of assets?
=
For fiscal year 2017, LaundryMate Products had income as follows:
55,000,000$
38,400,000$
Selling and administrative expense 5,700,000
1,000,000 45,100,000
9,900,000
3,465,000
6,435,000$
Other pertinent information for 2017 follows:
Total assets 97,000,000$
Noninterest-bearing current liabilities 3,200,000
Required rate of return on invested capital 10%
Required
Calculate NOPAT, invested capital, and ROI for LaundryMate Products.
What-if?
Calculate ROI after the disposal of the equipment.
Solution: Exercise 12-8 Calculating ROI
Sales
Less:
Cost of goods sold
Interest expense
Income before taxes
Less income taxes
Net income
Consider the following information for HandyCraft Stores for 2017 and 2018:
Total assets 59,500,000$ 56,430,000$
Noninterest bearing current liabilities 4,400,000 4,950,000
Net income 3,650,000 4,950,000
Interest expense 2,420,000 2,975,000
Sales 66,000,000 96,250,000
40% 40%
Required
Calculate ROI for both years.
2017
NOPAT = + [ × ( )] =
Invested capital =
―=
ROI =
2018
NOPAT = + [ × ( )] =
Invested capital =
―=
ROI =
b. Break ROI down into profit margin and investment turnover.
2017
Profit margin Investment turnover
× =
2018
Profit margin Investment turnover
× =
c. Comment on the change in financial performance between 2017 and 2018.
Problem 12-6 Return on Investment, Profit Margin, and Investment Turnover
Tax rate
=
=
Consider the following information for HandyCraft Stores for 2017 and 2018:
Total assets 59,500,000$ 56,430,000$
Noninterest bearing current liabilities 4,400,000 4,950,000
Net income 3,650,000 4,950,000
Interest expense 2,420,000 2,975,000
Sales 66,000,000 96,250,000
40% 40%
Required
Calculate ROI for both years.
2017
b. Break ROI down into profit margin and investment turnover.
2017
2018
c. Comment on the change in financial performance between 2017 and 2018.
Solution: Problem 12-6 Return on Investment, Profit Margin, and Investment
Turnover
Tax rate
Between 2017 and 2018, ROI increased. This was due to an increase in investment
Required
a. Calculate ROI for both subsidiaries.
NOPAT = + [ × ( )] =
Invested capital =
―=
ROI =
NOPAT = + [ × ( )] =
Invested capital =
―=
ROI =
Residual income =
― ( × ) =
― ( × ) =
c. Which subsidiary has added the most to shareholder value in the last year?
d. Based on the limited information, which subsidiary is the best candidate for expansion? Explain.
b. Calculate EVA for both subsidiaries. Note that since no adjustments for “accounting distortions”
are being made, EVA is equivalent to residual income.
Hazardous Waste
Residential Waste
Hazardous Waste
=
Residential Waste
=
Required rate of return
10%
13%
Tax rate
40%
40%
Net income
1,870,000
6,600,000
Interest expense
1,375,000
8,030,000
Total assets
$15,300,000
$87,000,000
Noninterest bearing current liabilities
3,300,000
13,200,000
Problem 12-7 ROI and EVA
ELN Waste Management has a subsidiary that disposes of hazardous waste and a subsidiary that
collects and disposes of residential garbage. Information related to the two subsidiaries follows:
Hazardous Waste
Residential Waste
Required
a. Calculate ROI for both subsidiaries.
Residual income =
c. Which subsidiary has added the most to shareholder value in the last year?
d. Based on the limited information, which subsidiary is the best candidate for expansion? Explain.
Hazardous Waste
b. Calculate EVA for both subsidiaries. Note that since no adjustments for “accounting distortions”
are being made, EVA is equivalent to residual income.
$15,300,000
3,300,000
1,870,000
1,375,000
10%
13,200,000
6,600,000
8,030,000
13%
40%
Interest expense
Required rate of return
Solution: Problem 12-7 ROI and EVA
Tax rate
ELN Waste Management has a subsidiary that disposes of hazardous waste and a subsidiary that
collects and disposes of residential garbage. Information related to the two subsidiaries follows:
Total assets
Noninterest bearing current liabilities
Net income
40%
Hazardous Waste
Residential Waste
$87,000,000
Residential Waste