E&F use a range of metrics to assess the performance of the company. The following information has
Question:
E&F use a range of metrics to assess the performance of the company.
The following information has been extracted from the accounts for the last two years
Income Statement ($000)
Balance Sheet ($000)
Additional information is as follows :
(i)Capital employed at the end of 20X7 was $2,480k. This included $2,100k of Non-Current Assets.
(ii) The pre-tax cost of debt for 20X8 and 20X9 was 5%.
(iii)E&F had non-capitalized leases of $100k in both years. The leases were not subject to amortization.
(iv)A mortised goodwill was $120k in 20X8 and $130k on 20X9. The annual amortization charge was $10k.
(v) The cost of equity was estimated at 8% for both years.
(vi)The economic depreciation for both years was the same as the depreciation used for accounting and tax purposes. However, the replacement cost of Non-Current Assets is 10%higher than stated in the accounts.
(vii)The target capital structure was 40% debt and 60% equity for both years.
(viii)The company uses a cost of capital of 8% to assess the viability of any new projects being considered.
Required:
(a)Calculate the following performance metrics for both years and comment on the company's performance.
- Return on Investment.
- Residual Income.
- Economic Value Added.
All calculations should use a capital employed figure at the beginning of the year.
Discuss the similarities and differences between the three metrics used in part (a).