Question

Financial data for Windsor, Inc. for last year appear below:

Windsor, Inc. Statements of Financial Position
	Beginning Balance		Ending Balance
Assets:
Cash	$	250,000	$	260,000
Accounts receivable		120,000		135,000
Inventory		230,000		205,000
Plant and equipment (net)		420,000		380,000
Investment in Pine Company		220,000		250,000
Land (undeveloped)		430,000		430,000
Total assets	$	1,670,000	$	1,660,000
Liabilities and owners equity:
Accounts payable	$	160,000	$	140,000
Long-term debt		800,000		800,000
Owners equity		710,000		720,000
Total liabilities and owners equity	$	1,670,000	$	1,660,000

Windsor, Inc. Income statement
Sales			$	1,750,000
Less operating expenses				1,470,000
Net operating income				280,000
Less interest and taxes:
Interest expense	$	96,000
Tax expense		70,000		166,000
Net income			$	114,000

The company paid dividends of $104,000 last year. The "Investment in Pine Company" on the statement of financial position represents an investment in the stock of another company.

Required:
a.	Compute the company's margin, turnover, and return on investment for last year.

Margin	%
Turnover
Return on investment	%

b.	The Board of Directors of Windsor, Inc. has set a minimum required return of 25%. What was the company's residual income last year?

Residual income

$

C. Windor's CFO has heard about EVA and is curious about whether it might be a better measure to use for evaluating division managers. Windsor's long term debt trades at book value, with interest rate of 10% while its equity has a market value of $1,200,000. The company's cost of equity is 12%. Windsor's income tax rate is 40%. Calculate each of the following components of EVA for the company, as well as the final EVA figure:

a. Weighted average cost of capital

b. Investment, as measured for EVA calculations

Answer 1

Answer:-

a. Compute the company's margin, turnover, and return on investment for last year:-

Operating assets do not include investments in other companies or in undeveloped land:

	Beginning balance	Ending balance
Cash	250,000	260,000
Accounts Receivable	120,000	135,000
Inventory	230,000	205,000
Plant and Equipment (Net)	420,000	380,000
Total Operating Assets	1,020,000	980,000

Average operating assets = ($1,020,000 + $980,000)/2 = $1,000,000

Margin = Net Operating Income/Sales = $280,000 / $1,750,000 = 16%

Turnover = Sales / Average Operating Assets = $1,750,000 / $1,000,000 = 1.75

ROI = Margin x Turnover = 16% x 1.75 = 28%

b. The Board of Directors of Windsor, Inc., has set a minimum required return of 25%. What was the company's residual income last year:-

Net operating income	280,000
Minimum Required Return (25% x $1,000,000)	250,000
Residual Income	30,000

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