Question

Multinational firms, differing risk, comparison of profit, ROI and RI Zynga Multinational, Inc., has divisions in the United States, Germany, and New Zealand. The U.S. division is the oldest and most established of the three, and has a cost of capital of 8%. The German division was started three years ago when the exchange rate for euro was 1 euro = $1.25. It is a large and powerful division of Zynga, Inc., with a cost of capital of 12%. The New Zealand division was started this year, when the exchange rate was 1 New Zealand Dollar (NZD) = $0.60. Its cost of capital is 14%. Average exchange rates for the current year are 1 = euro $1.40 and 1 NZD = $0.64. Other information for the three divisions includes the following:

Required
1. Translate the German and New Zealand information into dollars to make the divisions comparable. Find the after-tax operating income for each division and compare the profits.
2. Calculate ROI using after-tax operating income. Compare among divisions.
3. Use after-tax operating income and the individual cost of capital of each division to calculate residual income and compare.
4. Redo requirement 2 using pretax operating income instead of net income. Why is there a big difference, and what does it mean for performanceevaluation?


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  • CreatedNovember 14, 2011
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