East Valley Manufacturing had gross profit of $450,000 and selling & administrat

Question

East Valley Manufacturing had gross profit of $450,000 and selling & administrative expenses of $275,000 last year. The company also began last year with $1,800,000 of operating assets and ended the year with $1,500,000 of operating assets.

Calculate Return on Investment for East Valley Manufacturing.

Saguaro Boat Engines had sales of $6,400,000, cost of goods sold of $4.8 million, and selling & administrative expenses of $650,000 for its most recent year of operation. The company%u2019s tax rate is 40%. The total Capital Employed by the firm is $5,000,000. The following information is also available.

                          Debt/Stock      Int Rate

Long-Term Debt            $1,000,000         12%

Common Stock              $3,000,000          8%

1.    In good order and form, prepare an income statement for Saguaro.

2.    Calculate EVA

Explanation / Answer

Hi,

Please find the answer as follows:

Part A:

ROI = Net Income/Average Operating Assets*100 = (450000 - 275000)/(1800000 + 1500000)/2 = 10.61%

Part B:

Income Statement

EVA = Net Operating Profit after Taxes - Capital Charge

Net Operating Profit after Taxes = 950000*(1-.40) = 570000

Capital Charge = Capital Employed*WACC

WACC = 12*(1000000)/(1000000 + 3000000) + 8%(3000000)/(1000000 + 3000000) = 9%

EVA = 570000 - 5000000*.09 = 120000

Thanks.

Sales 6400000 Less COGS 4800000 Gross Profit 1600000 Less Selling and Administrative Expenses 650000 EBIT 950000 Less Interest (1000000*.12) 120000 EBT 830000 Less Taxes 332000 Net
498000 Less Dividends (3000000*.08) 240000 Income Transferred to Retained Earnings 258000

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