MUST SHOW WORK! Part III. (16 Points). Assume the Cake Division of the Nylah\'s

Question

MUST SHOW WORK! Part III. (16 Points). Assume the Cake Division of the Nylah's Bakery, Inc. had the following results last year (in thousands) Management's target rate of return is 10% and the weighted average cost of capital is 790 Its effective tax rate is 30%. Sales Operating income Total assets Current liabilities S 6,000,000 900,000 3,000,000 750,000 What is the division's sales margin? (4 points) What is the division's capital turnover? (4 points). What is the division's Return on Investment (ROI)? (4 Points). What is the division's Residual Income (RI)? (4 Points)

Explanation / Answer

1 Division Sales margin cake division sales margin = net profit / Sales *100   =$900,000/$6,000,000   *100 =15% 2 Capital Turnover Capital turnover ratio = Cost of goods sold /capital Employed =$5100,000/$2250,000 =2.27 Cost of goods sol =Sale - Net Operating Income =$6000,000-$900,000 =$5100,000 capital employed =Total Assets - Current Liabilties =3000,000-750,000 =$2250,000 3 Return on invesment Return on investment =Net Income /Total Assets *100 =$900,000/$3000,000   *100 =30% 4 Division resudual Income Amount in $ net Income $900,000 less: required raturn $300,000 Residual income $600,000 Required return =Total Assets * management required return =$3000,000*10% =$300,000

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