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Comfy Ltd manufactures furniture in several divisions, including the Home Division and the Outdoor Division. The company's required rate of return is 8%. Some divisional financial measures for the current quarter are as follows: Home Division Outdoor Division Total assets $ 1,425,000 $ 1,650,000 $ 330,000 Current liabilities $ 420,000 Operating profit $ 124,000 $ 128,000 Required: (a) Calculate the return on investment (ROI) for each division using total assets as a measure of invested capital. (1 mark) (b) Calculate the residual income (RI) for each division using total assets minus current liabilities as a measure of invested capital. (2 marks) (c) The Home Division manager argues that the Outdoor Division has 'loaded up a lot of short-term debt' to boost its RI. Calculate an alternative RI for each division that is not sensitive to the amount of short-term debt taken on by the divisions. Comment on the result. (3 marks) (d) Comfy Ltd has two sources of funds: long-term debt with a market value of $400,000 at an after-tax interest rate of 6%, and equity capital with a market value of $600,000 and a cost of equity of 11%. The company tax rate is 30%. Calculate the economic valued added (EVA) for each division. (3 marks) (e) Are the measures above consistent in comparing the performance of the two divisions? (1 mark)

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