?Exercise 1233Segmented Income Statement; TVCable Company
Countywide Cable Services, Inc. is organized with three segments: Metro, Suburban, and Outlying.
Data for these segments for the year just ended follow.
Metro Suburban Outlying
Service revenue ………………………………………….$1,000,000 $800,000 400,000
Variable expenses ……………. 200,000 150,000 100,000
Controllable fixed expenses …………………………… 400,000 320,000 150,000
Fixed expenses controllable by others ……………… 230,000 200,000 90,000
In addition to the expenses listed above, the company has $95,000 of common fixed expenses.
Income-tax expense for the year is $145,000.
Required:
1.Prepare a segmented income statement for Countywide Cable Services, Inc. Use the contribution format.
?Exercise 1327Calculate Weighted-Average Cost of Capital for EVA
Golden Gate Construction Associates, a real estate developer andbuilding contractorin San Francisco, has two sources of long-term capital: debt and equity. The cost to Golden Gate of issuing debt is the after-tax cost of the interest paymentson the debt, taking intoaccountthe fact that the interest payments are tax deductible. The cost of Golden Gates equity capital is the investment opportunity rate of Golden Gates investors, that is, the rate they could earn on investments of similar risk to that of investing in Golden Gate Construction Associates. The interest rate on Golden Gates $60 million of long-term debt is 10 percent, and the companys tax rate is 40 percent. The cost of Golden Gates equity capital is 15 percent. Moreover, the market value (and book value) of Golden Gates equity is $90 million.
Required:Calculate Golden Gate Construction Associates weighted-average cost of capital.
?Exercise 1328Economic Value Added (EVA); Continuation of Preceding Exercise
Refer to the data in the preceding exercise for Golden Gate Construction Associates. The company has two divisions: the real estate division and the construction division. The divisions total assets, current liabilities, and before-tax operating income for the most recent year are as follows:
Division Total Assets Current Before-Tax
Liabilities Operating Income
Real estate …… $100,000,000 $6,000,000 $20,000,000
Construction …… 60,000,000 4,000,000 18,000,000
Required:Calculate the economic value added (EVA) for each of Golden Gate Construction Associates divisions. (You will need to use the weighted-average cost of capital, which was computed in the preceding exercise.)
?Exercise 1329ROI; Residual Income
Wyalusing Industries has manufactured prefabricated houses for over 20 years. The houses are constructed in sections to be assembled on customers lots. Wyalusing expanded into the precut housing market when it acquired Fairmont Company, one of its suppliers. In this market, various types of lumber are precut into the appropriate lengths, banded into packages, and shipped to customers lots for assembly.
Wyalusing designated the Fairmont Division as an investment center. Wyalusing uses return on investment (ROI) as a performance measure with investment defined as average productive assets. Management bonuses are based in part on ROI. All investments are expected to earn a minimum return of 15 percent before income taxes. Fairmonts ROI has ranged from 19.3 to 22.1 percent since it was acquired. Fairmont had an investment opportunity in 20×1 that had an estimated ROI of 18 percent. Fairmonts management decided against the investment because it believed the investment would decrease the divisions overall ROI. The 20×1 income statement for Fairmont Division follows. The divisions productive assets were $12,600,000 at the end of 20×1, a 5 percent increase over the balance at the beginning of the year.
FAIRMONT DIVISION
Income Statement
For the Year Ended December 31, 20×1
(in thousands)
Sales revenue ………………………………………………………………………………………………….$24,000
Cost of goods sold ……………………………………………………………………………………………..15,800
Gross margin ……………………………………………………………………………………………………..$8,200
Operating expenses:
Administrative ………………………………………………………………………………………………………2,140
Selling …………………………………………………………………………………………………………………3,6005,740
Income from operations before income taxes …………………………………………………………….$ 2,460
Required:
1.Calculate the following performance measures for 20×1 for the Fairmont Division.
a.Return on investment (ROI).
b.Residual income.
2.Would the management of Fairmont Division have been more likely to accept the investment
opportunity it had in 20×1 if residual income were used as a performance measure instead of ROI?
Explain your answer.