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The management of HHH Corp. is attempting to evaluate financial performance of its divisions. For 2020,...

The management of HHH Corp. is attempting to evaluate financial performance of its divisions. For 2020, Division A reported a net operating profit before taxes of $50,000,000, a net income of $21,000,000, total assets of $180,000,000, and total liabilities of $100,000,000 including current liabilities of $25,000,000. HHH’s required rate of return is 12%, which is its weighted-average cost of capital. Assume an income tax rate of 40%.

1. Compute Division A’s return on investment, residual income, and economic value added. Show your work. (9 points)

2. Residual income is often preferred over return on investment as a performance evaluation measure. Explain the reason using a hypothetical scenario. (11 points)

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ekkarill92 answered 2 years ago
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