Mr. Jones is the President of DEF Canada Limited which is a subsidiary of a large multinational firm that is traded on a major stock exchange.

The parent company has responsivity for all capital expenditure decisions of the subsidiary, and can dictate if the subsidiary must discontinue operations in a market segment and sell the associated assets used in this segment.

During 2019 the parent company told the subsidiary that it must discontinue product XYZ and late in 2019 DEF discontinued the production and sales of product XYZ. Specific assets held for disposition and not used in 2020 total have gross value of $27,778.

All entities are evaluated on the return on the assets invested and the required return must be at least 10% in order to earn annual bonuses which are scaled up as the ROI increases above the 10% required return.

For purposes of ROI, fixed assets are valued at gross value and not net value.

On the next pages you see condensed summary financial statements for DEF for the year ended December 31, 2020 and a proposed capital expenditure.

Questions for This Scenario

1. Comment on the appropriate return on investment calculation for Mr. Jones and calculate the amount to 1 decimal place.?
2. Comment on the appropriate return on investment calculation for DEF Limited and calculate the amount to 1 decimal place.?
3. Comment on the appropriate return on investment calculation for the large multinational firm and calculate the amount to 1 decimal place.?
4. Would Mr. Jones be motivated to make the capital investment at the present time. BRIEFLY justify your answer?.
5. Do you think the bonus system suits the shareholders best interests?
   BRIEFLY justify your answer.

Financial Statements

DEF Canada Limited
Balance Sheet as at December 31, 2020

Item	$
Current assets	$27,000
Non-current assets	63,000
Total assets	$90,000
Current liabilities	$15,300
Long term debt	45,000
Equity	29,700
Total liabilities and equity	$90,000

Idle Assets $27,778

Required return from
operations based on total 10%
gross assets

DEF Canada Limited
Income Statement

for the year ended December 31, 2020

Item	$
Sales	$108,000
Cost of sales	69,300
Gross Margin	38,700
Selling and Administrative	27,270
Operating income	11,430
Interest at 6%	2,430
Net Income before tax	9,000
Income tax	3,000
Net income	$6,000

Answer rating: 100% (QA)

1 Mr Jones has managed to reach and exceed the ROI Target Measures 2 DEF Canada has failed to reach ... View the full answer