Solano Company has sales of $840,000, cost of goods sold of $540,000, other operating expenses of $70,000, average invested assets of $2,450,000, and a hurdle rate of 11 percent.


Required:
1. Determine Solano’s return on investment (ROI), investment turnover, profit margin, and residual income. (Do not round your intermediate calculations. Enter your ROI and Profit Margin percentage answer to the nearest 2 decimal places, (i.e., 0.1234 should be entered as 12.34%). Round your Investment Turnover answer to 4 decimal places.)
Return on Investment Turnover= __%

Investment Turnover

Profit Margin= __ %

Residual Income (Loss)=
     

2. Several possible changes that Solano could face in the upcoming year follow. Determine each scenario’s impact on Solano’s ROI and residual income. (Note: Treat each scenario independently.) (Enter your ROI percentage answers to 2 decimal places, (i.e., 0.1234 should be entered as 12.34%.))

   a. Company sales and cost of goods sold increase by 40 percent.      

Return on Investment= __ %

Residual Income (Loss)=  

         
       
    b. Operating expenses decrease by $12,000.        
      
       

Return on Investment= __ %

Residual Income (Loss)=  

         

   c. Operating expenses increase by 10 percent.

         

Return on Investment= __ %

Residual Income (Loss)=  

       

    d. Average invested assets increase by $470,000.

Return on Investment= __ %

Residual Income (Loss)=  

                

    e. Solano changes its hurdle rate to 17 percent.

Return on Investment= __ %

Residual Income (Loss)=

Solano Company has sales of $820,000, cost of goods sold of $530,000, other operating expenses of $60,000, average invested assets of $2,400,000, and a hurdle rate of 11 percent.


Required:
1. Determine Solano’s return on investment (ROI), investment turnover, profit margin, and residual income. (Do not round your intermediate calculations. Enter your ROI and Profit Margin percentage answer to the nearest 2 decimal places, (i.e., 0.1234 should be entered as 12.34%). Round your Investment Turnover answer to 4 decimal places.)

Return on investment-

Investment turnover-

Profit Margin-

Residiual Income(loss)-

2. Several possible changes that Solano could face in the upcoming year follow. Determine each scenario’s impact on Solano’s ROI and residual income. (Note: Treat each scenario independently.) (Enter your ROI percentage answers to 2 decimal places, (i.e., 0.1234 should be entered as 12.34%.))

   a. Company sales and cost of goods sold increase by 30 percent.    

ROI-

Residual Income(loss)-

    b. Operating expenses decrease by $11,000.   

ROI-

Residual Income(loss)-

c. Operating expenses increase by 20 percent.

ROI-

Residual Income(loss)-

d. Average invested assets increase by $460,000.

ROI-

Residual Income(loss)-

e. Solano changes its hurdle rate to 16 percent.

ROI-

Residual Income(loss)-

Income Statement

Pietro Frozen Foods, Inc., produces frozen pizzas. For next year, Pietro predicts that 53,700 units will be produced, with the following total costs:

Next year, Pietro expects to purchase $127,500 of direct materials. Projected beginning and ending inventories for direct materials and work in process are as follows:

Next year, Pietro expects to produce 53,700 units and sell 53,000 units at a price of $17.00 each. Beginning inventory of finished goods is $42,500, and ending inventory of finished goods is expected to be $34,000. Total selling expense is projected at $29,500, and total administrative expense is projected at $112,500.

Required:

1. Prepare an income statement in good form. Round the percent to four decimal places before converting to a percentage. For example, .88349 would be rounded to .8835 and entered as 88.35.

2. What if the cost of goods sold percentage for the past few years was 50.17 percent? Management's reaction might be:

Colonial Pharmaceuticals is a small firm specializing in new products. It is organized into two divisions, which are based on the products they produce. AC Division is smaller and the life of the products it produces tend to be shorter than those produced by the larger SO Division. Selected financial data for the past year is shown below. Divisional investment is as of the beginning of the year. Colonial Pharmaceuticals uses a 9 percent cost of capital and uses beginning-of-the-year investment when computing ROI and residual income. Ignore income taxes.

Required:

a. Compute divisional income for the two divisions.

division income

ac division

so division

b. Calculate the operating margin, which is equivalent to the return on sales, for the two divisions. (Enter your answers as a percentage rounded to 2 decimal places (i.e., 32.16).)

operating margin

AC division %

SQ divison %

c. Calculate ROI for the two divisions. (Enter your answers as a percentage rounded to 2 decimal places (i.e., 32.16).)

Roi

AC divison %

So divison %

d. Compute residual income for the two divisions. (Negative amounts should be indicated by a minus sign.)

residual income for ac division So division

E10-5 Calculating Return on Investment, Residual Income, Determining Effect of Changes in Sales, Expenses, Invested Assets, Hurdle Rate on Each [LO 10-4, 10-5]

Solano Company has sales of $520,000, cost of goods sold of $380,000, other operating expenses of $51,000, average invested assets of $1,650,000, and a hurdle rate of 8 percent.


Required:
1. Determine Solano’s return on investment (ROI), investment turnover, profit margin, and residual income. (Do not round your intermediate calculations. Enter your ROI and Profit Margin percentage answer to the nearest 2 decimal places, (i.e., 0.1234 should be entered as 12.34%). Round your Investment Turnover answer to 4 decimal places.)

     

2. Several possible changes that Solano could face in the upcoming year follow. Determine each scenario’s impact on Solano’s ROI and residual income. (Note: Treat each scenario independently.) (Enter your ROI percentage answers to 2 decimal places, (i.e., 0.1234 should be entered as 12.34%.))

   a. Company sales and cost of goods sold increase by 40 percent.      

         
       
    b. Operating expenses decrease by $10,500.        
      
                

   c. Operating expenses increase by 20 percent.

                

    d. Average invested assets increase by $310,000.

                

    e. Solano changes its hurdle rate to 14 percent.

        

Calculating Weighted Average Cost of Capital and Economic Value Added (EVA)

Ignacio, Inc., had after-tax operating income last year of $1,196,000. Three sources of financing were used by the company: $1 million of mortgage bonds paying 4 percent interest, $5 million of unsecured bonds paying 6 percent interest, and $9 million in common stock, which was considered to be relatively risky (with a risk premium of 8 percent). The rate on long-term treasuries is 3 percent. Ignacio, Inc., pays a marginal tax rate of 30 percent.

Required:

1. Calculate the after-tax cost of each method of financing. Enter your answers as decimal values rounded to three places. For example, 4.36% would be entered as ".044".

2. Calculate the weighted average cost of capital for Ignacio, Inc. Round intermediate calculations to four decimal places. Round your final answer to four decimal places before converting to a percentage. For example, .06349 would be rounded to .0635 and entered as "6.35" percent.

fill in the blank 4 %

Calculate the total dollar amount of capital employed for Ignacio, Inc.

$ fill in the blank 5

3. Calculate economic value added (EVA) for Ignacio, Inc., for last year. If the EVA is negative, enter your answer as a negative amount.

$ fill in the blank 6

Is the company creating or destroying wealth?

Destroying

4. What if Ignacio, Inc., had common stock which was less risky than other stocks and commanded a risk premium of 5 percent? How would that affect the weighted average cost of capital?
Lower

What is the new EVA? In your calculations, round weighted average percentage cost of capital to four decimal places. If the EVA is negative, enter your answer as a negative amount.

$ fill in the blank 9

Before the Christmas shopping rush began, a department store had noted that the percentage of customers who use a major credit card, the percentage who use the store’s credit card, the percentage who pay by debit card, and the percentage who pay with cash are all the same, 25% for each. During the Christmas season, in a sample of 200 shoppers, 68 used a major credit card, 42 used the store’s credit card, 45 paid with cash, and 45 paid with a debit card. At a 95% confidence level, test to see if the methods of payment have changed during the Christmas shopping rush.

The graph illustrates the distribution of test scores taken by College Algebra students. The maximum possible score on the test was 110, while the mean score was 72 and the standard deviation was 8.

48 56 64 72 80 88 96 Distribution of Test Scores

What is the approximate percentage students who scored between 64 and 80 on the test?


What is the approximate percentage of students who scored between 56 and 88 on the test?


What is the approximate percentage of students who scored between 48 and 72 on the test?


What is the approximate percentage of students who scored higher than 96 on the test?
%