K. Johnson, Inc.'s managers want to evaluate the firm's prior-year performance in terms of its contribution to

Question:

K. Johnson, Inc.'s managers want to evaluate the firm's prior-year performance in terms of its contribution to shareholder value. This past year, the firm earned an operating return on investment of 12 percent, compared to an industry norm of 11 percent. It has been estimated that the firm's investors have an opportunity cost on their funds of 14 percent, which is the same as the firm's overall cost of capital. The firm's total assets for the year were $100 million. Compute the amount of economic value created or destroyed by the firm. How does your finding support or fail to support what you would conclude using ratio analysis to evaluate the firm's performance?

Opportunity Cost
Opportunity cost is the profit lost when one alternative is selected over another. The Opportunity Cost refers to the expected returns from the second best alternative use of resources that are foregone due to the scarcity of resources such as land,...