PROBLEM - ELN Waste Management has a subsidiary that disposes of hazardous waste and a subsidiary that collects and disposes of residential garbage. Information related to the two subsidiaries follows.
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Hazardous Waste
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Residential Waste
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Total assets
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$13,000,000
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$70,000,000
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Noninterest-bearing current liabilities
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3,000,000
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12,000,000
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Net income
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1,700,000
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6,000,000
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Interest expense
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1,250,000
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7,300,000
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Required rate of return
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12%
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14%
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Tax rate
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40%
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40%
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Required
a. Calculate ROI for both subsidiaries.
b. Calculate EVA for both subsidiaries. Note that since no adjustments for accounting distortions are being made, EVA is equivalent to residual income.
c. Which subsidiary has added the most to shareholder value in the last year?
d. Based on the limited information, which subsidiary is the best candidate for expansion? Explain.