Pilot Corporation has established separate business units as investment centres and the manager's performance is measured...

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Pilot Corporation has established separate business units as investment centres and the manager's performance is measured using financial measures. Bonuses of up to one third of the manager's salaries are paid for achieving the targets as described below. The following is known about the Alpha Division's results: Profit: Sales revenue: Invested Capital Required: $8 000 000 $100 000 000 $50 000 000 a) Calculate the Return on Investment (ROI) for the Alpha Division? b) Assuming Sales Revenue is 'fixed' by market competition, use the two component ratios to demonstrate two ways the Alpha Division could improve ROI, increasing it to 18%. (Ensure you state the amount of cost cutting or capital reduction necessary and SHOW ALL WORKINGS and calculations supporting your answer.) c) Assume a 30% tax rate applied and the Alpha Division had trade creditors (which was a 'free finance' source to the company) of $5 million and Pilot has a Weighted Average Cost of Capital (WACC) of 12% then: i. Calculate the Economic Value Add (EVA) ii. Recalculate the EVA if the WACC was 15%, would the performance of the Alpha Division be acceptable or unacceptable, why, or why not? Pilot Corporation has established separate business units as investment centres and the manager's performance is measured using financial measures. Bonuses of up to one third of the manager's salaries are paid for achieving the targets as described below. The following is known about the Alpha Division's results: Profit: Sales revenue: Invested Capital Required: $8 000 000 $100 000 000 $50 000 000 a) Calculate the Return on Investment (ROI) for the Alpha Division? b) Assuming Sales Revenue is 'fixed' by market competition, use the two component ratios to demonstrate two ways the Alpha Division could improve ROI, increasing it to 18%. (Ensure you state the amount of cost cutting or capital reduction necessary and SHOW ALL WORKINGS and calculations supporting your answer.) c) Assume a 30% tax rate applied and the Alpha Division had trade creditors (which was a 'free finance' source to the company) of $5 million and Pilot has a Weighted Average Cost of Capital (WACC) of 12% then: i. Calculate the Economic Value Add (EVA) ii. Recalculate the EVA if the WACC was 15%, would the performance of the Alpha Division be acceptable or unacceptable, why, or why not?

Answer rating: 100% (QA)

SOLUTION a Return on Investment ROI is calculated by dividing the divisions profit by its invested capital and multiplying by 100 to express it as a percentage The formula is ROI Profit Invested Capit... View the full answer