Question 5 (1 point) X Company currently has a capital turnover of 2. If the com

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Question 5 (1 point) X Company currently has a capital turnover of 2. If the company can increase its sales margin from 4.5% to 6%. What is the percentage point increase in the company's ROI? tenth of a percent. For example, if ROI increased from 4.5% to 6.22%, an increase of 1.72 percentage points, enter 1.7. If ROI increased from 4% to 5%, enter 1.0 Express your answer to the nearest Save Question 6 (1 point) ROI is the most popular measure of investment-center performance. Another measure of investment-center performance is residual income. The Midwest Division of X Company has a profit of $120,000. The division has invested capital of $1,000,000 while X company has an imputed interest rate of 10%. Compute the Midwest Division's residual income. Do not enter dollar signs or commas. For example, enter $30,000 as 30000. Save

Explanation / Answer

(5)

ROI = Sales margin x capital turnover ratio

ROIbefore = 4.5% x 2 = 9%
ROIafter = 6% x 2 = 12%

So, increase in ROI = 3%

(6)

Residual income = Operating Income - Imputed interest x Average operating assets

= 120000 - 10% x 1000000 = 20,000

(7)

EVA = Operating Income x (1 - tax rate) - WACC x (Total assets - current liabilities)

= 120000 x (1 - 0.3) - 0.08 x (1100000 - 100000) = 4000

(8)

D = market value of debt = 7000000
E = market value of equity = 3000000
V = total market value of the firm’s financing = D+E = 10000000
WACC = (E/V)*Cost of equity + (D/V)*Cost of debt*(1 - tax rate)

= 0.3*10% + 0.7*6%*30% = 4.26%

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