Question: Hamilton Corp is a reinsurance and financial services company Hamilton

Hamilton Corp. is a reinsurance and financial services company. Hamilton strongly believes in evaluating the performance of its standalone divisions using financial metrics such as ROI and residual income. For the year ended December 31, 2013, Hamilton’s CFO received the following information about the performance of the property/ casualty division:
Sales revenues ........... $ 1,200,000
Operating income ......... 200,000
Total assets ............ 1,250,000
Current liabilities ......... 250,000
Debt (interest rate: 6.25%) ...... 600,000
Common equity ......... 400,000
For the purposes of divisional performance evaluation, Hamilton defines investment as total assets and income as operating income (that is, income before interest and taxes). The firm pays a flat rate of 20% in taxes on its income.

1. What was the net income after taxes of the property/ casualty division?
2. What was the division’s ROI for the year?
3. Based on Hamilton’s required rate of return of 10%, what was the property/ casualty division’s residual income for 2013?
4. Hamilton’s CFO has heard about EVA and is curious about whether it might be a better measure to use for evaluating division managers. Hamilton’s four divisions have similar risk characteristics. Hamilton’s debt trades at book value while its equity has a market value approximately twice that of its book value. The company’s cost of equity capital is 12%. Calculate each of the following components of EVA for the property/ casualty division, as well as the final EVA figure:
a. Net operating profit after taxes
b. Weighted-average cost of capital
c. Investment, as measured for EVA calculations

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  • CreatedMay 14, 2014
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