Bull\'s market had the following results for last year and at the last year end

Question

Bull's market had the following results for last year and at the last year end (in thousands).

Sales $10,000,000
Operating income 2,000,000
Total Assets 20,000,000
Current Liabilities 1,000,000

Management's required rate of return is 8%
Bull's average weighted cost of capital is 6%
Bull's effective income tax rate is 30%

a. What is division's profit margin?
b. What is the division's capital turnover?
c. What is the division's Return on Investment (ROI)?
d. What is the division's Residual Income (RI)?
e. What is the division's Economic Value Added (EVA)?

Explanation / Answer

a)Net profit margin= (2,000,000-600000)/10,000,000 = 14% Gross profit margin= 2000000/10000000= 20% b)capital turnover= [(20,000,000 - 1,000,000)x8%]/10,000,000 = 15.2% c)Return on Investment=2,000,000 /2,000,0000 = 10% d)Residual Income= 2,000,000 -(20,000,000x6%)= $800000 e)Economic Value Added = [2,000,000(1-.3)]- [6%x(20,000,000 - 1,000,000)] = 1400000-1140000 =$260000

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