Problem 12-7 Calculate EVA for both subsidiaries. Note that since no adjustments
ID: 2476453 • Letter: P
Question
Problem 12-7
Calculate EVA for both subsidiaries. Note that since no adjustments for accounting distortions are being made, EVA is equivalent to residual income.
Which subsidiary has added the most to shareholder value in the last year?
Problem 12-7
ELN Waste Management has a subsidiary that disposes of hazardous waste and a subsidiary that collects and disposes of residential garbage. Information related to the two subsidiaries follows:Hazardous
Waste Residential
Waste Total assets $15,210,000 $86,490,000 Noninterest-bearing current liabilities 3,270,000 13,290,000 Net income 1,970,000 6,650,000 Interest expense 1,440,000 8,100,000 Required rate of return 10% 13% Tax rate 40% 40%
Explanation / Answer
Answer a
Hazardous waste
Residential waste
Net income (assuming after tax and interest)
1970000
6650000
Total assets
15210000
86490000
ROI
12.95%
7.69%
Answer b
Hazardous waste
Residential waste
Net income (assuming after tax and interest) (A)
1970000
6650000
Total assets (B)
15210000
86490000
Required rate of return ( C)
10%
13%
EVA (A)-((B)*©)
449000
-4593700
Answer c
Hazardious waste
Hazardous waste
Residential waste
Net income (assuming after tax and interest)
1970000
6650000
Total assets
15210000
86490000
ROI
12.95%
7.69%