CoursHeroTranscribedText: i "9.1 3 Residual income, economic value added (EVA') (25 minutes) Intervilles SA operates...
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CoursHeroTranscribedText: i "9.1 3 Residual income, economic value added (EVA') (25 minutes) Intervilles SA operates two divisiOns, a Lorry Rental Division that rents to individuals and a Transportation Division that transports goods from one city to another. Results reported for the last year are as follows: Lorry Rental Transportation Division Division Total assets 650 000 950 000 Current liabilities 120 000 200 000 Operating prot before tax 75 000 160 000 Required 1 Calculate the residual income for each division using operating prot before tax and investment equal to total assets minus current liabilities. The required rate of return on investments is 12%. The company has two sources of funds: long-term debt with a market value of 900 000 at an interest rate of 10% and equity capital with a market value of 600 000 at a cost of equity of 15%. Intervilles' income tax rate is 40%. Intervilles applies the same weighted-average cost of capital to both divisions, since each division faces similar risks. Calculate the economic value added (EVAQ) for each division. Using your answers to requirements 1 and 2, what would you conclude about the performance of each division? Explain briey
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