P24-20A Using ROI, RI, and EVA to evaluate investment centers [30–45 min]

 

Consider the following condensed financial statements of Money Freedom, Inc. The company’s target rate of return is 10% and its WACC is 7%:

 

MONEY FREEDOM, INC

Comparative Balance Sheet

As of December 31, 2012 and 2011

 

Assets                                                  2012                2011

Cash                                                                $77,000                       $66,000

Accounts receivable                                        62,500             28,400

Supplies                                                           500                  600

Property, plant, and equipment, net                 300,000                       200,000

Patents, net                                                      160,000                       105,000

Total assets                                                      $600,000         $400,000

Liabilities and stockholder’s equity

Accounts payable                                            $32,000                       $34,000

Short term notes payable                                 $146,000         48,000

Long term notes payable                                  200,000                       130,000

Common stock, no par                                                200,000                       167,500

Retained earnings                                            22,000            20,500

Total liabilities and stock holder’s equity         $600,000         $400,000

 

MONEY FREEDOM INC.

Income Statement

For the Year Ended December 31, 2012

 

Sales revenue                                       $5,000,000

COGS                                                  2,900,000

Gross profit                                         $2,100,000

Operating expenses                              1,900,000

Operating income                                $200,000

Other: interest expense                                    (20,000)

Income before income tax expense     $180,000

Income tax expense                             (63,000)

Net income                                          $117,000

 

Requirements

1. Calculate the company’s profit margin. Interpret your results.
2. Calculate the company’s asset turnover. Interpret your results.
3. Use the expanded ROI formula to confirm your results from Requirement 1. Interpret your results.
4. Calculate the company’s RI. Interpret your results.
5. Calculate the company’s EVA. Interpret your results.

 

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