P24-23B Using ROI, RI, and EVA to evaluate investment centers
Consider the following condensed financial statements of Secure Life, Inc. The company’s target rate of return is 12% and its WACC is 9%:
SECIRE LIFE INC.
Comparative Balance Sheet
As for December 31, 2013 and 2012
Assets 2013 2012
Cash $82,000 $50,000
Accounts receivable $4,000 20,500
Supplies 1,000 500
Property, Plant and equipment, net 275,000 180,000
Patents, net 138,000 99,000
Total assets $550,000 $350,000
Liabilities and Stockholder’s Equity
Accounts payable $40,000 $32,000
Short term notes payable 135,000 45,000
Long-term notes payable 170,000 125,000
Common stock, nopar 150,000 130,000
Retained earnings 55,000 18,000
Total liabilities and stockholders’ equity $550,000 $350,000
SECURE LIFE,INC
Income Statement
For the Year Ended December 31, 2013
Sales revenue $6,750,000
COGS 3,200,000
Gross profit $3,550,000
Operating expenses 1,525,000
Operating income $2,025,000
Other: Interest Expense (17,000)
Income before income tax expense $2,008,000
Income tax expense (702,800)
Net income $1,305,200
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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