Shallowater Cattle Company

Selected Operating Division Information

Hale Center Division Floydada Division Post Division

Sales Revenue (Net) $180,000,000 $56,000,000 $5,500,000

Operating Expenses* 177,600,000 55,090,000 5,290,000

Operating Income 2,400,000 910,000 210,000

Working Capital# 3,600,000 1,120,000 220,000

Long-Term Assets# 6,400,000 2,380,000 280,000

Total Assets (Net)+# 10,000,000 3,500,000 500,000

Hale Center Division Floydada Division Post Division

Return on Assets 2,400/10,000=24.0% 910/3,500=16% 210/500=42%

Asset Turnover 180,000/10,000=18% 56,000/3,500=16% 5,500/500=11%

Return on Sales 2,400/180,00=1.33% 910/56,000=1.63% 210/5,500=3.82%

Economic Value

Added 2,400-(10,000)(7%) 910-(3,500)(7%) 210-(500)(7%)

=1,700,000 =665,000 =175,000

Division Percentage 10,000/25,950 3,500/25,950 500/25,950

of Total Assets (Net) =38.5% =13.5% =19.3%

Division Percentage

of Sales Revenue (Net) 180,000/28,000 56,000/28,000 5,500/28,000

=6.4% =20.0% =19.6%

Division Percentage

of Operating Income 2,400/2,600=92.3% 910/2,600=35.0% 210/2,600=8.0%

Division Percentage

of Economic Value

Added 1,700/783.5=21.7% 665/783.5=84.9% 175/783.5=22.3

Hale Center Division Floydada Division Post Division

Risk Adjusted

Cost of Capital 8.5% 23.0% 5.0%

Economic Value

Added 2,400-(10,000)(8.5%) 910-(3,500)(23.0%) 210-(500)(5.0%)

=1,550,000 =105,000 =185,000

Division Percentage

of Economic

Value Added 1,500/756.1=19.7% 105/786.1=13.4% 185/786.1= 23.5%

Hale Center Division Floydada Division Post Division

Working Capital as

a Percentage of

Total Assets (Net) 3,600/10,000=36% 1,120/3,500=32% 220/500=44%

Working Capital as a

Percentage of

Sales Revenue (Net) 3,600/180,000=2% 1,120/56,000=2% 220/5,500=4%

The above information reveals quite a bit about the company and its three divisions.Based on the above information, identify and describe all relevant factors concerning this company.Questions you might want to consider are as follows:

1.What are your overall observations about each division?

2.Using operating income, which division is the best performing and/or most important?

3. Using economic value added based on a common capital cost, which division is the best performing and/or most important?

4.Using economic value added based on risk adjusted capital costs, which division is the best performing and/or most important?

5.How do you reconcile the above?

6.If the individual divisions are price takers (i.e. have no significant market power) and have excess capacity, what course of action would you recommend for each division?

7. If the individual divisions have significant market power and, thus, are price setters, how would this affect your above recommendations?

8. When evaluating divisions within a company would you recommend use of a single metric or a basket of metrics?