Question
In: Accounting
Crane Corporation recently announced a bonus plan to reward the manager of its most profitable division....
Crane Corporation recently announced a bonus plan to reward the
manager of its most profitable division. The three divisional
managers are to decide which performance measure will be used to
evaluate profitability. Crane Corporation requires a 10% minimum
return on investment.
The following information is available for the year just
ended.
| Division |
Gross Book Value of Assets |
Divisional Operating Income |
|||
| Ashton | $800,000 | $94,800 | |||
| Drye | 749,800 | 91,810 | |||
| Poole | 441,000 | 58,330 |
(a) Calculate return on investment.
(Round ROI to 2 decimal places, e.g.
5.12%.)
| Return on Investment | |
| Ashton |
% |
| Drye |
% |
| Poole |
% |
Which division performed the best?
Poole Drye Ashton
(b) Calculate residual income. (If the
amount is negative then enter with a negative sign preceding the
number, e.g. -5,125)
| Residual Income | |
| Ashton | $ |
| Drye | $ |
| Poole | $ |
Which division performed the best?
Drye Poole Ashton
(c) Assume that Crane Corporation’s
weighted-average cost of capital is 6% and its tax rate is 22%.
Calculate economic value added. (If the amount is
negative then enter with a negative sign preceding the number, e.g.
-5,125)
| Economic Value Added | |
| Ashton | $ |
| Drye | $ |
| Poole | $ |
Which division performed the best?
Poole Drye Ashton
Solutions
Expert Solution
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| Crane Corporation | ||||
| Answer a | Ashton | Dry | Poole | Note |
| Divisional Operating Income | 94,800.00 | 91,810.00 | 58,330.00 | A |
| Gross Book Value Assets | 800,000.00 | 749,800.00 | 441,000.00 | B |
| Return on investment | 11.85% | 12.24% | 13.23% | C=A/B |
| Poole performed the best because its Return on investment is highest. |
| Answer b | Ashton | Dry | Poole | Note |
| Gross Book Value Assets | 800,000.00 | 749,800.00 | 441,000.00 | See B |
| Required return | 10.00% | 10.00% | 10.00% | D |
| Required income | 80,000.00 | 74,980.00 | 44,100.00 | E=B*D |
| Operating Income | 94,800.00 | 91,810.00 | 58,330.00 | F |
| Residual Income | 14,800.00 | 16,830.00 | 14,230.00 | G-F-E |
| Dry performed the best because its Residual Income is highest. |
| Answer c | ||||
| EVA= NOPAT- (WACC* capital invested) | Ashton | Dry | Poole | Note |
| Divisional Operating Income | 94,800.00 | 91,810.00 | 58,330.00 | See A |
| Tax rate | 22.00% | 22.00% | 22.00% | H |
| Tax amount | 20,856.00 | 20,198.20 | 12,832.60 | I=A*H |
| NOPAT | 73,944.00 | 71,611.80 | 45,497.40 | J=A-I |
| Gross Book Value Assets | 800,000.00 | 749,800.00 | 441,000.00 | See B |
| Cost of capital | 6.00% | 6.00% | 6.00% | K |
| WACC* capital invested | 48,000.00 | 44,988.00 | 26,460.00 | L=B*K |
| Economic value added | 25,944.00 | 26,623.80 | 19,037.40 | M=J-L |
| Dry performed the best because its Economic Value Added is highest. |
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