Question

ELN Waste Management has a subsidiary that disposes of hazardous waste and a subsidiary that collects and disposes of residential garbage. Information related to the two subsidiaries follows:

				Hazardous Waste	Residential Waste
Total Assets				15,300,000	87,000,000
Noninterest-bearing current liabilities				3,300,000	13,200,000
Net Income				1,870,000	6,600,000
Interest Expense				1,375,000	8,030,000
Required rate of return				10%	13%
Tax rate				40%	40%

A. Calculate the ROI for both subsidiaries

B. Calculate the EVA for both subsidiaries. Note that since no adjustments for accounting distortions are being made, EVA is equivalent to residual income.

C. Which subsidiary has added the most to shareholder value in the last year?

D. Based on the limited information, which subsidiary is the best candidate for expansion? Explain.

Answer 1