Consider the following facts: Division A in a firm has generated $847,000 of profits on $24 million

Question:

Consider the following facts: Division A in a firm has generated $847,000 of profits on $24 million worth of sales, using $32 million worth of dedicated assets. The cost of capital for this firm is 9%, and the firm has invested $7.3 million in this division.

a. Calculate the ROS and ROA of Division A. If the hurdle rate for ROS and ROA in this firm are, respectively, 0.06 and 0.04, has this division performed well?

b. Calculate the EVA of Division A (assuming that the reported profits have already been adjusted). Based on this EVA, has this division performed well?

c. Suppose you were CEO of this firm, how would you choose between ROS/ROA and EVA for evaluating this division?

Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...