Calculate return on invested capital, Financial Accounting

Assignment Help:

Five years ago Ramon Millan quit his job as an associate at a large law firm and opened a burger joint in Malibu. His innovative use of aged blue cheeses and specialty sauces resulted in soaring popularity. He has since opened numerous stores around Los Angeles. While most of his stores are franchised, some are still company owned. Company stores are operated by managers, and those managers are evaluated on return on invested capital (ROIC), which equals profits divided by invested capital. A higher ROIC is viewed as better performance and is compensated accordingly. For purposes of this question, assume that tax rates are zero.

Two of the company units, Delbasso and Habermehl, are considering expanding their menus to include specialty pizzas. Purchase and installation of the necessary equipment costs $180,000 per store and adding pizza should increase profits by $30,600 for each store. The current investment in Delbasso, which is managed by Serena Delbasso, totals $890,000. Delbasso's revenues are $1,100,500 and expenses are $924,420. Investment in the Habermehl store, which is managed by Deidre Habermehl, stands currently at $1,740,000. Habermehl's revenues are $1,760,800 and expenses are $1,496,680. Answer the following questions.

(a)    Calculate ROIC for Delbasso for the two cases where the pizza investment is not made and where the pizza investment is made. Would Serena Delbasso seek to expand her menu to include pizza?

(b)   Calculate ROIC for Habermehl for the same two scenarios in part a). Would Deidre Habermehl seek to expand her menu to include pizza?

(c)    Would your answers to a) and b) change if the two stores were franchised? Whereas company stores are evaluated based on ROIC, assume that franchised stores are evaluated based on economic income. Assume also that the cost of capital is 14%.

(d)   Do you have any advice for Ramon Millan regarding the metric he uses to evaluate managers of company-owned stores?


Related Discussions:- Calculate return on invested capital

Fund flow, Fund flow Math problem and solution.

Fund flow Math problem and solution.

methods of costing, Q.2  Explain different methods of costing. Your answer...

Q.2  Explain different methods of costing. Your answer should be studded with examples (preferably firm name and product) for each method of costing.

FDD , fimnancial accounting system

fimnancial accounting system

Cost of capital calculation, Cost of capital calculation Cost of equit...

Cost of capital calculation Cost of equity (Ke) Using the dividend valuation model, Ke=D 1 /P 0 + g Pretentious that dividend growth over the last five years is a good

Wacc and gearing, WACC and gearing There are two major theories linking...

WACC and gearing There are two major theories linking a company's WACC and its gearing ratio. (i) The usual theory of gearing proposes a "U" shaped WACC curve. Cost of c

Concepts in accounting, Mr. Inherits 30000. Decides to open a salon jj salo...

Mr. Inherits 30000. Decides to open a salon jj salon. On 1/4/2016 commits 10000 to the business Opens an a/c in the bank What will be the money under capital in his books on 1/4/10

Exceptions to the rule of lapse-executorship laws, Exceptions to the rule o...

Exceptions to the rule of lapse There is no lapse in either of the following cases: 1. Where the gift or disposition is made in discharge of a moral obligation recognised by t

Inter company balances-group accounts, Inter Company balances One of th...

Inter Company balances One of the companies may appear as receivable (debtor) or payable (creditor) in the other company’s books. Just like in accounting four branches, such in

Construct the market value balance sheet, Construct the Market Value Balanc...

Construct the Market Value Balance Sheet XYZ, Inc., another company founded by Larry Davidson in 2005, is currently entirely equity financed. That means the company carries no

Calculate the pv and npv, Question 1 Suppose you take out a loan of $10...

Question 1 Suppose you take out a loan of $10,000, repayable by five equal annual instalments. The interest rate is 10% per year. (a) How much do you need to repay per year

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd