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Benson Ltd operates a Car Division (that sells high-performance sport cars) and a Parts Division (that sells performance-improvement parts for family cars). The companys required rate of return is 8%. Some divisional financial measures for the current quarter are as follows:

	Car Division	Parts Division
Total assets	$ 3,300,000	$ 2,850,000
Current liabilities	$ 660,000	$ 840,000
Operating profit	$ 247,500	$ 256,500

Required:

(a) Calculate the return on investment (ROI) for each division using total assets as a measure of invested capital. (1 mark)

(b) Calculate the residual income (RI) for each division using total assets minus current liabilities as a measure of invested capital. (2 marks)

(c) The Car Division manager argues that the Parts Division has loaded up a lot of short-term debt to boost its RI. Calculate an alternative RI for each division that is not sensitive to the amount of short-term debt taken on by the divisions. Comment on the result. (3 marks)

(d) Benson Ltd has two sources of funds: long-term debt with a market value of $1,800,000 at an after-tax interest rate of 6%, and equity capital with a market value of $1,200,000 and a cost of equity of 12%. The company tax rate is 30%. Calculate the economic valued added (EVA) for each division. (3 marks)

(e) Are the measures above consistent in comparing the performance of the two divisions? (1 mark)

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