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QUESTION 3

Lets Go Limited (Lets Go) is a provider of financial services in Namibia. At Lets Go, performance is measured using the balanced scorecard (BSC) that measures the companys performance using the four quadrant of financial, customer, learning and growth and internal business processes. Within the financial quadrant, the company uses return on investment (ROI) and residual income (RI) to measure their financial performance in all its divisions. The following represents the financial information extracted by the accountant for the venture capital division for the year 2021.

	N$
Sales revenues	1 200 000
Operating Income	200 000
Total Assets	1 250 000
Current Liabilities	250 000
Debt (cost: 6.25%)	600 000
Equity	400 000

For the purposes of divisional performance evaluation, Lets Go defines investment as Equity + Liabilities and they pay a flat rate of 20% in taxes on its income. Income is defined as operating income (before depreciation and tax).

REQUIRED:

3.1

Calculate the profit after tax for the venture capital division?

3.2

Calculate the venture capital divisions return on investment (ROI) for the year?

3.3

Assuming that Let's Gos cost of capital is 10%, calculate the division's residual income (RI)?

3.4

Let's Go's CFO has heard about Economic Value Added (EVA) and is curious about whether it might be a better measure to use for evaluating divisional managers. Let's Gos four divisions have similar risk characteristics. The companys debt trades at book value while its equity has a market value approximately twice that of its book value. The companys cost of equity capital is 12%. Calculate each of the following components of EVA for the venture capital division, as well as the final EVA figure:

I) Net operating profit after taxes ?

II) Weighted-average cost of capital ?

III) Investment as measured for EVA calculations?

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