Zee Network Ltd. Annual Result of FY 2003-2004 Problem to compute ROA and RI/EVA based on segmented Results of ZNL

ZEE NETWORK Anuual Results Segment-wise(Division-wise)B&C Access Film Prodn. Education Others Elimination Total

& Distri.Revenue External 11,209,613 1,438,968 752,650 130,745 169,945 0 13,701,921

Inter-Seg. 254,660 325,973 1,989 0 66,355 -648,977 0

Total 11,464,273 1,764,941 754,639 130,745 236,300 -648,977 13,701,921

Segment OPBIT 3,903,029 -49,455 203,782 -10,581 23,705 -452 4,070,028Result

a)Seg.Assets(Gross) 27,662,593 4,067,946 1,154,562 84,616 939,175

ROA (G) OPBIT/a 14 -1 18 -13 3

10% Cost Of Capital 2,766,259 406,795 115,456 8,462 93,918

EVA/Residual Income 1,136,770 -456,250 88,326 -19,043 -70,213

Problem 1: - ROIMAC Ltd. Is a subsidiary of CMA Ltd., which uses Rate Of Return as a performance measure of division. The trial balance of MAC Ltd. As on December 31, 2003 is given as under Trial Balance as on 31 December 2003

Building 5,00,000Accumulated Depreciation

Investment 1,00,000 Building 2,50,000Plant 2,00,000 Plant 1,50,000Patents 50,000 Creditors 40,000Cash 25,000 Loans 50,000Receivables 75,000 Provision for Taxes 10,000Stocks 2,50,000 Share Capital 2,50,000Cost of Goods Sold 4,50,000 Reserves 2,50,000Other Expenses 3,50,000 Sales 10,00,000

20,00,000 20,00,000

Compute Rate of Return and Evaluate the performance of MAC against Gross Assets, Total Net Assets, Total Net Assets Employed, Shareholder’s Funds, Shareholders Funds Year End, Shareholder’s Funds Average, Replacement Value of assets.The present realizable/replacement value of the assets of the MAC is 20,00,000

Solution – Sales 10,00,000-COGS 4,50,000-Other Exp. 3,50,000

2,00,000

Net Income

1. Rate Of Return (Gross Assets) = ---------------- Gross Assets

1

Gross Assets = 5,00,000 + 1,00,000 + 2,00,000 + 50,000 + 25,000 + 75,000 + 2,50,000 = 12,00,000

2,00,000

Rate Of Return (Gross Assets) = -------------- * 100 = 16.67% 12,00,000

Net Income

2. Rate Of Return (Net Assets) = ---------------- Net Assets

2,00,000

Rate Of Return (Gross Assets) = ----------------------------- * 100 = 25% 12,00,000 – ,2,50,000 – 1,50,000

Net Income

3. Rate Of Return (Net Assets Employed) = ----------------------------- Net Assets Employed

2,00,000

Rate Of Return (Net Assets Employed) = ----------------------------- * 100 = 28.60 % 8,00,000- 1,00,000 (investment )

Net Income

4. Rate Of Return (Shareholder’s Funds) = ------------------------- Shareholder’s Funds

2,00,000

Rate Of Return (Shareholder’s Funds) = -------------- * 100 = 40 % 5,00,000

2,00,000

4.1 Rate Of Return (Shareholder’s Funds year end ) = ----------------------------- * 100 = 28.60 % 5,00,000 + 2,00,000(Current year profit)

2,00,000

4.2 Rate Of Return (Shareholder’s Funds Average) = --------------------------- * 100 = 33.30 % (5,00,000 + 2,00,000 / 2 )

2,00,000

5 Rate Of Return (Replacement Value) = --------------- * 100 = 10.00 % 20,00,000

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Problem 2 – ROI & RI-EVAThe JKL company used the residual income method for measuring divisional profit performance. The company charges each division a 5% return on its average current assets and 10% return on its average fixed assets. Financial data for the company is given as under –

DivisionBudget Data J K L

1997 budgeted profit 90000 55000 500001997 budgeted Current Assets 100000 200000 3000001997 budgeted Fixed Assets 400000 400000 500000

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Actual Data1997 Profits 80000 60000 500001997 Current Assets 90000 190000 3500001997 Fixed Assets 400000 450000 550000

Find –A. Calculate objective ROI and Actual ROIB. Calculate objective RI and Actual RI find variationC. Listed below are four management actions together with their financial

implications, find their impact on budgeted ROI and RI for each division (Calculate the extent to which these actions help or hurt the divisional managers’ in attaining their profit goals)

1. An investment in fixed assets is made. This action increases the average fixed assets by Rs. 100000 and profits by Rs. 10000.

2. An investment in fixed assets is made. This action increases the average fixed assets by Rs. 100000 and profits by Rs. 7000.

3. A program to reduce inventories is instituted as a result inventories are reduced by Rs 50000. Increased costs and reduced sales resulting from the lower inventory levels reduce profit by Rs. 5000

4. A plant is closed down and sold. Fixed assets are reduced by Rs.75000 and profits (from reduced sales) are decreased by Rs. 7500

Solution- Computation of ROI Budgeted

Budget 97 J K LProfit 90 55 50Current Assets 100 200 300Fixed Assets 400 400 500Total Assets 500 600 800

ROI =(Profit / Total Assets)*100 18.00 9.17 6.25

Computation of RI-EVA Budgeted

Capital Charge 5% of C A 5 10 15Capital Charge 10% of FA 40 40 50Total Charge 45 50 65Residual Income (RI) 45 5 -15

Computation of ROI Actual

Actual 97 J K LProfit 80 60 50Current Assets 90 190 350Fixeds 400 450 550Total Assets 490 640 900

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ROI =(Profit / Total Assets) * 100 16.33 9.38 5.56

Computation of RI-EVA Actual Capital Charge 5% of C A 4.50 9.50 17.50Capital Charge 10% of FA 40 45 55Total Charge 44.50 54.50 72.50Residual Income (RI) 35.50 5.50 -22.50

Variation from budgeted figures (EVA) -9.50 0.50 -7.50

C1: Increase in FA by 1,00,000 & Profit by 10,000Revised ROI Computations Revised RI Computations

Actual 97 J K L J K LProfit 90 70 60 Profit 90 70 60Current Assets 90 190 350 Capital Charge 5% of C A 4.5 9.5 17.5Fixeds 500 550 650 Capital Charge 10% of FA 50 55 65Total Assets 490 640 900 Total Charge 54.5 64.5 82.5

ROI 18.37 10.94 6.67 Residual Income (RI) 35.50 5.50 -22.50

C2: Increase in FA by 1,00,000 & Profit by 7,000Revised ROI Computations Revised RI Computations

Actual 97 J K L J K LProfit 87 67 57 Profit 87 67 57Current Assets 90 190 350 Capital Charge 5% of C A 4.5 9.5 17.5Fixeds 500 550 650 Capital Charge 10% of FA 50 55 65Total Assets 490 640 900 Total Charge 54.5 64.5 82.5

ROI 17.76 10.47 6.33 Residual Income (RI) 32.50 2.50 -25.50

C-3. Reduction in inventories by Rs 50000. & reduction in profits by Rs. 5000

Revised ROI Computations Revised RI ComputationsActual 97 J K L J K LProfit 75 55 45 Profit 75 55 45Current Assets 40 140 300 Capital Charge 5% of C A 2 7 15Fixeds 400 450 100 Capital Charge 10% of FA 40 45 10Total Assets 490 640 900 Total Charge 42 52 25

ROI 15.31 8.59 5.00 Residual Income (RI) 33.00 3.00 20.00

C-4. Reduction in Fixed Assets by Rs 75,000 & reduction in profits by Rs. 7500

Revised ROI Computations Revised RI ComputationsActual 97 J K L J K LProfit 72.5 52.5 42.5 Profit 72.5 52.5 42.5Current Assets 90 190 350 Capital Charge 5% of C A 4.5 9.5 17.5Fixeds 325 375 25 Capital Charge 10% of FA 32.5 37.5 2.5

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Total Assets 490 640 900 Total Charge 37 47 20

ROI 14.80 8.20 4.72 Residual Income (RI) 35.50 5.50 22.50

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Problem 3: - ROI & EVAXYZ company has three divisions X,Y & Z. For the current year, the following data were reported –

X Y ZSales Revenue (Rs) 800000 ? ?Profit (Rs) 80000 640000 ?Investment (Rs) 400000 ? 2000000Investment Turnover ? 4 ?Margin of Profit on Sale ? ? 15ROI ? 20 ?Residual Income(10% cost of capital)

? ? 202000

Required – 1. Complete the table2. rank the division in terms of their effective use of resource in capturing the

market. Solution –

X Y ZSales Revenue (Rs) 800000 12800000 2680000Profit (Rs) 80000 640000 402000Investment (Rs) 400000 3200000 2000000Investment Turnover 2 4 1.34Margin of Profit on Sale 10 5 15ROI 20 20 20.1Residual Income 40000 320000 202000(10% cost of capital)

Problem 4: - RIP Company’s plastic division had a return on investment on gross assets of 15% for the year. The division’s return on investment on net assets was 20% and on net assets employed ROI was 24%. The division’s net income for the year was Rs. 450000 and residual income was Rs. 85000. The only contra-assets accounts the division has are accumulated depreciation accounts.Required –

1. The company’s gross assets.2. The company’s total amount of accumulated depreciation.3. The amount of assets not employed in the business.4. The target income used in computing residual income if the net assets

turnover is 2.4

Solution – Net Income

1. ROI (Gross Aseets) = ------------------ * 100Gross Assets

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15% = 4,50,000/GA

i.e. Gross Assets = (4,50,000/15 )*100= 30,00,000

Net Income

2. ROI (Net Aseets) = ------------------ * 100Net Assets

20% = 4,50,000/GA

i.e. Net Assets = (4,50,000/20 )*100= 22,50,000

Accumulated Depreciation = GA –NA = 30,00,000 – 22,50,000= 7,50,000

Net Income

3. ROI (Net Aseets Employed) = ------------------ * 100Net Assets Employed

24% = 4,50,000/GA

i.e. Net Assets Employed = (4,50,000/24)*100= 18,75,000

4. Net Assets Turnover = Sales / Net Assets2.4 = Sales / 22,50,000

Sales = 2.4 * 22,50,000 = 54,00,000

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Problem 5:- Auto Equipment Co is organized into three divisions operated as investment center. Data for 3 years for the Shock Absorber division are as follows –

Year 3 Year2 Year1Sales 1210000 1100000 1000000Cost of Goods Sold 700000 600000 500000Operating Expenses 300000 250000 200000Current Assets 150000 120000 100000Fixed Assets 2000000 2000000 2000000Accumulated Depreciation 1400000 1100000 800000

Required – 1. Compute net income for each year.2. Compute ROI for each year using total gross assets.3. Compute ROI for each year using total net assets.4. What is the trend to the divisions performance.

Year 3 Year2 Year1Sales 1210000.00 1100000.00 1000000.00Cost of Goods Sold 700000.00 600000.00 500000.00Operating Expenses 300000.00 250000.00 200000.00Current Assets 150000.00 120000.00 100000.00

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Fixed Assets 2000000.00 2000000.00 2000000.00Accumulated Depreciation 1400000.00 1100000.00 800000.00

Net Income 210000.00 250000.00 300000.00

1.ROI (Gross Assets) 10.50 12.50 15.00

2. ROI (Net Assets) 35.00 27.78 25.00

3. ROI ( Total Net Assets) 28.00 24.51 23.08

XXTRAProblem 6: -Following is the year-end trial balance of HBC co. The Company closes its books on December 31. There were no stock transactions during the year.

Debit CreditCurrrent Assets 200,000.00 Fixed Assets 900,000.00 Accumulated Depreciation 350,000.00 land held for investment 300,000.00

Current Liabilities 50,000.00 Long Term liabilities 210,000.00 Capital Stock 240,000.00 Retained Earnings 400,000.00 Dividends 50,000.00

Sales 750,000.00 Cost of Goods Sold 340,000.00 Operating Expenses 210,000.00 Totals 2,000,000.00 2,000,000.00

Find – Return on Investment using

a. Gross asetsb. Net Assetsc. Gross Assets employedd. Net Assets employede. Beginning Owner’s equityf. Ending owner’s equity (Opn b/s + profit)

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Problem 8:- Osaka Corporation is a decentralized manufacturing company with three producing divisions. Following is a schedule of sales and cost data for the accounting year just completed.

Division A Division B Division CSales 225,000.00 90,000.00 600,000.00 Cost Of Goods Solds 105,000.00 37,500.00 360,000.00 Operating Expenses 90,000.00 30,000.00 150,000.00 Current Assets 75,000.00 30,000.00 120,000.00 Land Held for investment 0.00 120,000.00 0.00 Fixed Assets(Gross) 180,000.00 150,000.00 750,000.00 Accumulated Depreciation 90,000.00 15,000.00 525,000.00 Current Liabilities 15,000.00 22,500.00 60,000.00

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Long Term Liabilities 22,500.00 0.00 37,500.00

Compute – 1. Net Income for each division2. ROI using Gross assets3. ROI using Net assets4. ROI using gross assets employed5. Residual Income using a target income of 15% of net assets6. Income as a % of sales7. prepare a chart ranking the divisions for each of the performance

measures.

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