- Hotel Ownership: hotels owned and operated by Starwood -Vacation Ownership: re
ID: 2423680 • Letter: #
Question
- Hotel Ownership: hotels owned and operated by Starwood -Vacation Ownership: resort properties developed, owned, and operated for timeshare vacation owners.
Financial information for each division, from a recent annual report, is as follows, in millions.
a] use the DuPont formula to determine the return on investment for each of the Starwood business divisions. Round whole percentage to one decimal place and investment turnover to two decimal places.
b] determine the residual income for each division, assuming a minimum acceptable income of 5 percent of total assets. Round minimal acceptable return to the nearest million dollars.
c] interpret your results. Vacation Hotel Ownership $4,383 Ownership Revenues Income from operations Total assets 688 105 2,139 571 6,440 netment for each tment for each
Explanation / Answer
Return on investment=Net Income/Total Assets
DuPont Model segregates the formula into two parts
ROI=Net Income/Sales * Sales/Total Assets
First part , Net Income/Sales =Net profit margin
Second part , Sales/Total Assets gives the activity ratio as to how efficiently assets are being managed for operating activities.
On the basis of this, we can attribute high/low ROI to either Net profit margin or efficiency of assets.
The weak or strong area come come to surface.
Residual Income (RI) = A (B × C)
In the above formula,
A = Department's net operating income;
B = Minimum required return on assets; and
C = Average operating assets of the department
In the above question
1. Hotel Ownership
ROI=571/4383 * 4383/6440=0.13027 * 0.68059=0.08866 = 8.866 %
Residual income=571-219.15=351.85
Net operating income =571
Minimum income = 5% =5/100*4383 =219.15
2. Vacation ownership
ROI=105/688 * 688/2139=0.15261* 0.32164=0.049088 =4.9088 %
Residual income=105-(5/100*2139)=-1.95
3. Interepretation
Hotel ownership has met the minimum income requirement while Vacation ownership failed to meet the minimum residual income requirement.
Hotel ownership returns a greater ROI than vacation ownership .While the net profit margin is high for vacation ownership but the proportion however the assets are returning much larger proportion of sales for Hotel ownership due to which overall Return on investment on vacations falls behind Hotel ownership .
Residual Income (RI) = A (B × C)
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