Homework Problem Messier Company has two divisions, the Northern Division and th
ID: 2585953 • Letter: H
Question
Homework Problem Messier Company has two divisions, the Northern Division and the Southern Division. The following information pertains to last year's results: Northern Division Southern Division Net (after-tax) income $122,500 Operating assets $188,300 990,000 850,000 Messier's actual cost of capital is 15 percent Required (a) Compute the EVA for the Northern and Southern Divisions (b) Is each division creating or destroying wealth? (c) Now assume that Messier Company's tax rate is 30% and its top management has set a minimum acceptable rate of return equal to 10 percent. Compute the residual income for the Northern and Southern Divisions (d) Overall, which manager seems to being doing the better job?Explanation / Answer
Northern Division = 122,500 – (850,000 * 15%)
Northern Division EVA = (5,000)
Southern Division = 188,300 – (990,000 * 15%)
Southern Division EVA = 39,800
Northern Division = 122,500 – (850,000 * 10%)
Northern Division Residual Income = 37,500
Southern Division = 188,300 – (990,000 * 10%)
Southern Division Residual Income = 89,300
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