ACYMAG1
Exercises on Units 4.1 to 4.3
Term 1, AY2023-2024
EXERCISE 1. Ex. 10.7, Hansen and Mowen
Jarriot, Inc., presented the following two years of data for its two divisions:
Year 1 Year 2
Furniture Division:
Sales ₱35,000,000 ₱37,500,000
Operating income 1,400,000 1,500,000
Average operating assets 10,000,000 10,000,000
Houseware Division:
Sales ₱12,000,000 ₱12,500,000
Operating income 600,000 500,000
Average operating assets 5,000,000 5,000,000
1. Compute the (a) margin, (b) turnover, and (c) ROI for each year for the Furniture
Division. Round your answers to four significant digits.
2. Compute the (a) margin, (b) turnover, and (c) ROI for each year for the Houseware
Division. Round your answers to four significant digits.
3. Explain the change in ROI from Year 1 to Year 2 for each division.
Change $ to ₱
EXERCISE 2. Ex. 10.8 and 10.9, Hansen and Mowen
Refer to Exercise 1. At the end of Year 2, the manager of the Houseware Division is concerned
about the division’s performance. As a result, he is considering the opportunity to invest in two
independent projects. The first is called the Espresso-Pro; it is an in-home espresso maker that
can brew regular coffee as well as make espresso and latte drinks. While the market for
espresso drinkers is small initially, he believes this market can grow, especially around gift-
giving occasions. The second is the Mini-Prep appliance that can be used to do small chopping
and dicing chores that do not require a full-sized food processor. Without the investments, the
division expects that Year 2 data will remain unchanged. The expected operating income and
the outlay required for each investment are as follows:
Espresso-Pro Mini-Prep
Operating income ₱ 27,500 ₱ 19,000
Outlay 250,000 200,000
Jarriot’s corporate headquarters has made available up to ₱500,000 of capital for this division.
Any funds not invested by the division will be retained by headquarters and invested to earn the
company’s minimum required rate of return, 9 percent.
1. Compute the (a) ROI and (b) residual income for each investment.
2. Compute the (a) divisional ROI (rounded to four significant digits) and (b) divisional
residual income (rounded to the nearest peso) for each of the following alternatives:
Alternative One: The Espresso-Pro is added.
Alternative Two: The Mini-Prep is added.
Alternative Three: Both investments are added.
Alternative Four: Neither investment is made; the status quo is maintained.
3. Which alternative do you think the divisional manager will choose if the manager is
evaluated and rewarded on the basis of (a) ROI and (b) residual income performance.
Change $ to ₱
1 to 3 (ROI first part; RI second part)
EXERCISE 3. Ex. 10.11, Hansen and Mowen
Xenold manufactures and sells ovens through three divisions (profit centers): Home,
Restaurant, and Specialty. Data for each division for last year are as follows:
Home Restaurant Specialty
Sales ₱4,140,000 ₱3,600,000 ₱2,520,000
Cost of goods sold 2,900,000 2,640,000 1,700,000
Operating expenses 950,000 410,000 320,000
The income tax rate for Xenold is 40 percent. Xenold 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 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).
1. Prepare a segmented statement of profit or loss for Xenold for last year.
2. Calculate EVA for each division and for Xenold. Round WACC to four significant digits.
3. Comment on the performance of each of the divisions.
Change $ to ₱
#s 2 and 3 for req 2; #4 for req 3
4. While EVA is positive for Xenold, Inc., as a whole, it is negative for the
Home Division. Therefore, even though the Home Division has positive net
income, it needs to increase net income or reduce the capital used to
generate positive economic value added.
EXERCISE 4. Ex. 10.10, Hansen and Mowen
Brewster Company manufactures wine. Last year, Brewster earned operating income of
₱192,000 after income taxes. Capital employed equaled ₱2.3 million. Brewster is 45 percent
equity and 55 percent 10-year bonds paying 6 percent interest. Brewster’s marginal tax rate is
40 percent. The company is considered a fairly risky investment and probably commands a 12-
point premium above the 4 percent rate on long-term Treasury bonds. Jonathan is the new
company CEO and would like to improve the EVA under the following independent scenarios.
Round all percentage figures to four significant digits.
1. No changes are made; calculate EVA using the original data.
2. Brewster is considering expanding but needs additional capital. The company is
considering selling more common stock which would increase equity to 80 percent of
total financing. Total capital employed would be ₱3,000,000. The new after-tax
operating income would be ₱375,000. Using the original data, calculate EVA.
Change $ to ₱
2.
