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.
Hazardous Waste Residential Waste
Total assets $13,000,000 $70,000,000
Noninterest-bearing current liabilities 3,000,000 12,000,000
Net income 1,700,000 6,000,000
Interest expense 1,250,000 7,300,000
Required rate of return 12% 14%
Tax rate 40% 40%
Required to do:
Q1. Calculate ROI for both subsidiaries.
Q2. Calculate EVA for both subsidiaries. Note that since no adjustments for accounting distortions are being made, EVA is equivalent to residual income.
Q3. Which subsidiary has added the most to shareholder value in the last year?
Q4. Based on the limited information, which subsidiary is the best candidate for expansion? Explain.