Exam 12: Divisional Financial Performance Measurement

Figure 6 The following results for the year pertain to the Maddox Division of Ryan Ltd.: The weighted average cost of capital is 12 percent. The firm's minimum required rate of return is 14 percent. Taxes for the firm are 40 percent. -Refer to Figure 6. If average operating assets are £1,000,000, return on investment for the Maddox Division is

The manager of the recently formed Oak Division of Parkes, Incorporated, is evaluating the following four investment opportunities available to the division. Parkes, Incorporated, requires a minimum return of 10 percent. Required: a. Calculate the return on investment (ROI) for each investment opportunity. b. If only one investment opportunity can be funded and the division is evaluated based on ROI, which investment opportunity would be accepted? c. If Parkes, Incorporated, can fund all of the projects and wishes to achieve the best possible performance, which investments would be accepted?

Discuss the differences between centralized and decentralized decision making. Why would a firm decentralize its operations?

A negative EVA means

Stevens Company has two divisions that report on a decentralized basis. Their results for 2004 were as follows: Required: Compute the following amounts for each division: a. Return on investment (ROI) if the desired rate of return is 12 percent. b. Residual income if the desired rate of return is 20 percent. c. EVA. d. Turnover if the desired rate of return is 25 percent. e. Margin for each division if the desired rate of return is 10 percent.

Compare and discuss the advantages and disadvantages of the following performance measures: ROI, EVA, and Residual Income.