Reference no: EM13135933
The following data pertain to Hercules Health Club's operations for the most recent year.
Operating Income $125,000
Gross Book Value of Assets $950,000
Net Book Value of Assets $350,000
Liabilities $ 72,000
Corporate Tax Rate 28%
Value of Debt Outstanding $50,000
Cost of Debt 12%
Estimated Cost of Equity 15%
a. Calculate the ROI for Hercules. Use operating income and net book value of assets as the measures for income and investment respectively.
b. Compute the residual income for Hercules, using 14% as the required rate of return.
c. Compute the economic value added (EVA) for Hercules, making sure to separately show the calculation for weighted average cost of capital.
d. What factors might explain the unusually high ROI for Hercules?
e. Suppose Tom and Lynda identify a project that has a 20% ROI. Will they choose to invest in the project? Will your answer differ if, instead of being a family-owned business, Hercules was a branch in a network of gyms? What factors are central to your argument?
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