XYZ Corp. is financial services company. XYZ strongly believes in evaluating the performance of its...
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XYZ Corp. is financial services company. XYZ strongly believes in evaluating the performance of its stand-alone divisions using financial metrics. For the year ended December 31, 2017, XYZs top management received the following information about the performance of the property division: Income Statement Information: Sales revenues $ 900,000 Operating income $ 225,000 Balance Sheet Information: Total assets $ 1,500,000 Current liabilities $ 300,000 Debt (interest rate: 5%) $ 400,000 Common equity (book value) $ 500,000 XYZs debt trades at book value while its equity has a market value approximately 150% that of its book value. For the purposes of divisional performance evaluation, XYZ defines investment as total assets and income as operating income (that is, Earnings Before Interest and Tax (EBIT)). The firm pays a rate of 25% in taxes on its income. XYZ requires rate of return of 8% on its investment. a) What was the divisions ROI for the year? b) Using the required rate of return of 8% and compute the divisions RI? c) Using the companys cost of equity capital of 10% and compute EVA?
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