Hasbro, Inc. ("Hasbro") is a global play and entertainment company committed to 'Creating the World's Best Play and Entertainment Experiences'. From toys, games and consumer products to television, movies, digital gaming, and other entertainment experiences, Hasbro connects to global audiences by bringing to life great innovations, stories and brands across established and inventive platforms. Hasbro is committed to making the world a better place for all children, fans and families. The company reports that doing well includes 'doing good in the world and for all our constituents'.

As such, about 5 years ago Hasbro embarked on a brave new initiative when it launched a new division with the aim of supplying toy and game-related products and services to hard-to-reach communities. They called it the Toys Outreach Development (TOD). This is a new commercial experience for many at Hasbro. While the company has a strong community outreach function and actively supports good causes, Hasbro has never intervened in community activities to this extent. Neither have the senior management team intervened in divisional operations in the same way before, as they do with TOD. Some details regarding TOD are as follows:

• Hasbro's senior management team are committed to the corporate agenda of 'doing good in the world and for all our constituents' and decided that the majority of TODs products and services (80%) would be price-controlled. In other words, the prices TOD can charge for the majority of its products and services is controlled by Hasbro senior management.
• For these price-controlled products and services, the senior management team has set what they believe to be an acceptable Return on Capital Employed (ROCE) level.
• Thus, while TOD operates independently, Hasbro's senior management team actively reviews the pricing of TODs products and services within these price-controlled areas to ensure there are no breaches.
• The remaining services (20%) are not price-controlled by Hasbro management, and TOD is free to charge market prices.
• Besides the aforementioned controls, Hasbro is largely hands-off when it comes to managing TOD, affording the division control over its cost and investment decisions.

Hasbro's senior management team calculates the ROCE figure for the price-controlled areas based on its own valuation of the operating assets (capital employed) being used in the provision of these products and their operating profit.

The target pre-tax ROCE regarding the price-controlled operations set by the senior management team is 4.5%. If TOD were to breach this figure, then Hasbro's senior management reserve the right to levy a hefty fine against TOD.

TOD has recruited a new finance manager, who previously worked for a large financial institution. He is intent on trying to drive the performance of the division (i.e., TOD) towards generating wealth, in traditional financial terms. In order to try to better communicate the objective of maximizing shareholder wealth, TODs new finance manager has decided to introduce economic value added (EVA) as the key financial performance indicator. The finance director has asked you to calculate EVA for TOD, based on the following financial information for the year ending 30 June 2021:

PriceControlled NonControlled Total

$m $m $m

Revenue 142.0 41.0 183.0

Operating costs 121.0 18.0 139.0

Operating profit 21.0 23.0 44.0

Finance Expenses 16.0 Profit before tax 28.0 Tax (at 25%) 7.0 Profit after tax 21.0

Capital Employed

$m

TOD's Average Replacement Value of Operating Assets During 2021 528.0

Included in the number above, but separately measured by senior management team for price-controlled products only 478.0

Notes:

1. Total operating costs include: 2021

$m

Depreciation 21.0 Research and development 12.0 Other non-cash items 7.0

2. Economic depreciation is assessed to be $32 million in 2021. Economic depreciation includes any appropriate amortization adjustments. In previous years, it can be assumed that economic and accounting depreciation were the same.

3. Research and development costs are written off to the income statement in the year they are incurred. This is TOD's first meaningful investment in R&D, and relates to a new project that will be developed over the next five years. Management believe that the output of the project will have an infinite economic life.

4. Estimated Costs of Capital for TOD Equity 16% Pre-tax cost of debt 5%

5. Target capital structure for TOD Equity 40% Debt 60%

Homework questions:

2. Evaluate the performance of TOD using EVA. State any/all assumptions. Answer should consist of a quantitative and qualitative analysis;
4. List and explain TWO benefits and TWO criticisms of the new finance manager's pursuit of the maximization of shareholder wealth at TOD.
6. Assess whether TOD meets its imposed ROCE target and comment on the impact of such a constraint on performance management at TOD.