Zzwuig Multinational Inc has divisions in Canada Germany and New
Zzwuig Multinational Inc. has divisions in Canada, Germany, and New Zealand. The Canadian division is the old est and most established of the three, and has a cost of capital of 6%. The German division was started three years ago when the exchange rate for euros was 1 € = $1.25. Although it is a large and powerful division of Zzwuig Inc., its cost of capital is 10%. The New Zealand division was started this year, when the exchange rate was 1 New Zealand Dollar (NZD) = $0.64.
Its cost of capital is 13%. Average exchange rates for the current year are 1 € = = = = == $1.32 and
1 NZD = $0.67. Other information for the three divisions includes:
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 the results among divisions.
3. Use after-tax operating income and the individual cost of capital of each division to calculate and compare residual income of each division.
4. Redo requirement 2 using pretax operating income instead of net income. Why is there a big difference, and what does it mean for performance evaluation?
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