Return On Assets

Return on assets =       net income

Table of Contents

                                    Total assets


Return on assets based on historical cost

Division (Net assets) Historical cost (operating income

Historical cost

Return on net assets
shoes $15,000 $2,700 0.18 or 18%
clothing $45,000 $6,750 0.15 or 15%
accessories $30,000 $4,800 0.16 or 16%
Total 90,000 14,250

Return on assets based on replacement cost

Division (Net assets)

Replacement cost

(operating income

  1. cost
Return on net assets
shoes $15,000 $2,700 0.18 or 18%
clothing $55,000 $6,150 0.11 or 11%
accessories $48,000 $3,900 0.08 or 8%
Total 90,000 14,250

Residual income (RI)

Residual income = net operating income – (minimum rate of return on investment *                                                                                   operating assets)


Residual income based on historical cost (minimum required rate of return = 10%)

Division (Net assets) Historical cost (operating income

Historical cost

Residual income

($)

shoes $15,000 $2,700 1,200
clothing $45,000 $6,750 2,250
accessories $30,000 $4,800 1,800
Total 90,000 14,250

Residual income based on replacement cost (10% minimum required rate of return)

Division (Net assets)

Replacement cost

(operating income

  1. cost
Return on net assets

($)

shoes $15,000 $2,700 1200
clothing $55,000 $6,150 650
accessories $48,000 $3,900 (900)
Total 90,000 14,250

Q2:      based on the measures computed above,

Using Return on assets based on historical cost, the best performing department is shoes followed by accessories then clothing.

Using return on assets based on replacement cost, the best performing department is the shoes department followed by clothing and then accessories.

Using residual income based on historical cost, the best performing department is clothing department followed by accessories and lastly shoes.

Using return on assets based on replacement cost, the best performing department is the shoes department followed by accessories and lastly the clothing department.


Q3:      for the divisions,

The return on assets show the efficiency of the company in the revenue generation from the assets it has. Hence for the divisions, the higher the rate of return on assets, the better that particular department utilizes its assets.

For the managers,

A division with a higher rate of return is an indication of how efficiently a manager can utilize the assets of that particular department to achieve profitability.

Managers being evaluated using residual income will be more likely to accept opportunities yielding return rates higher than the investment capital charge.


 Economic value added for coca cola

Net operating income after taxes = 3,691,000,000-1,222,000,000 = 2,469,000,000

Cost of capital = 5%

Long term debt= 4,674,000,000

Cost of capital = 0.05 * 4,674,000,000 = 233,700,000

EVA = NOPAT – (Capital * Cost of Capital)

2,469,000,000 – [(0.30 * 4,674,000,000) * 0.12]

= 2300736000


Q2:      EVA

According to Marshal et al. (2003), economic value added gives us a company’s true economic profit. It shows the ability of a company’s top management to maximize the wealth of its shareholders and investors.


References

Marshal, D.H, McManus, W.W., Viele, D. F. (2003) Accounting: What the Numbers Mean, 6th Edition. McGraw Hill Professional





Is this your assignment or some part of it?

We can do it for you! Click to Order!



Order Now


Translate »

You cannot copy content of this page