19-3 Heather Smith Cosmetics (HSC) manufactures a variety of products and is organized into three divisions (investment...

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Finance

19-3
Heather Smith Cosmetics (HSC) manufactures a variety of productsand is organized into three divisions (investment centers): soapproducts, skin lotions, and hair products. Information about themost recent year’s operations follows. The information includes thevalue of intangible assets, including research and development,patents, and other innovations that are not included on HSC’sbalance sheet. Were these intangibles to be included in thefinancial statements (as they are for EVA®), the increase in thebalance sheet and the increase in after-tax operating income wouldbe as given below:
Division Operating
Income Average
Total Assets Value of
Intangibles Intangibles’
Effect on Income
Soap products $ 3,240,500 $ 59,990,500 $ 1,490,500 $ 990,500
Skin lotions 2,740,500 32,990,500 7,990,500 5,990,500
Hair products 4,990,500 54,990,500 990,500 690,500
Minimum desired rate of return 5.00 %
Cost of capital 4.00 %
Required:
1. Calculate the return on investment (ROI) for each division.(Round your answers to 2 decimal places. (i.e. .1234 =12.34%))
2. Calculate the residual income (RI) for each division.
3. Calculate EVA^® for each division.

Answer & Explanation Solved by verified expert

3.7 Ratings (696 Votes)

Solution 1 The Return on Investment ROI is calculated using the formula Return on Investment Operating IncomeAverage total assets ROI of Soap products ROI 324050059990500 ROI 00540 or 540 ROI of See Answer

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Division	Operating Income			Average Total Assets		Value of Intangibles		Intangibles’ Effect on Income
Soap products	$	3,240,500		$	59,990,500	$	1,490,500	$	990,500
Skin lotions		2,740,500			32,990,500		7,990,500		5,990,500
Hair products		4,990,500			54,990,500		990,500		690,500
Minimum desired rate of return		5.00	%
Cost of capital		4.00	%