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Aurora Borealis Paints is a national paint manufacturer and retailer

Aurora Borealis Paints is a national paint manufacturer and retailer. The company is segmented into five divisions: Paint Stores (branded retail locations), Consumer (paint sold through stores like Canadian Tire, Home Hardware, and RONA), Automotive (sales to auto manufacturers), International, and Administration. The following is selected divisional information for its two largest divisions: Paint Stores and Consumer (in thousands of dollars).

Assume that management has specified a 23% target rate of return. Further assume that the company’s weighted average cost of capital is 14% and its effective tax rate is 32%.

Requirements

Round all calculations to four decimal places.

1. Calculate each division’s ROI.

2. Calculate each division’s profit margin. Interpret your results.

3. Calculated each division’s asset turnover. Interpret your results.

4. Use the expanded ROI formula to confirm your results from Requirement 1. Interpret your results.

5. Calculate each division’s RI. Interpret your results and offer recommendations for any division with negative RI.

6. Calculate each division’s EVA. Interpret your results.

7. Describe the conceptual and computational similarities and differences between RI and EVA.

8. Total asset data was provided in this problem. If you were to gather this information from an annual report, how would you measure total assets? Describe your measurement choices and some of the pros and cons of those choices.

9. Describe some of the factors that management considers when setting its minimum target rate of return.

10. Explain why some firms prefer to use RI rather than ROI for performance measurement.

11. Explain why budget versus actual performance reports are insufficient for evaluating the performance of investment centres.

Assume that management has specified a 23% target rate of return. Further assume that the company’s weighted average cost of capital is 14% and its effective tax rate is 32%.

Requirements

Round all calculations to four decimal places.

1. Calculate each division’s ROI.

2. Calculate each division’s profit margin. Interpret your results.

3. Calculated each division’s asset turnover. Interpret your results.

4. Use the expanded ROI formula to confirm your results from Requirement 1. Interpret your results.

5. Calculate each division’s RI. Interpret your results and offer recommendations for any division with negative RI.

6. Calculate each division’s EVA. Interpret your results.

7. Describe the conceptual and computational similarities and differences between RI and EVA.

8. Total asset data was provided in this problem. If you were to gather this information from an annual report, how would you measure total assets? Describe your measurement choices and some of the pros and cons of those choices.

9. Describe some of the factors that management considers when setting its minimum target rate of return.

10. Explain why some firms prefer to use RI rather than ROI for performance measurement.

11. Explain why budget versus actual performance reports are insufficient for evaluating the performance of investment centres.

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