Question: ROI, RI, EVA. Hamilton Corp. is a reinsurance and financial services company. Hamilton strongly believes in evaluating the performance of its stand-alone divisions using financial metrics such as ROI and residual income. For the year ended December 31, 2017, Hamilton's CFO received the following information about the performance of the property/casualty division:
For the purposes of divisional performance evaluation, Hamilton defines investment as total assets and income as operating income (that is, income before interest and taxes). The firm pays a flat rate of 25% in taxes on its income.
1. What was the net income after taxes of the property/casualty division?
2. What was the division's ROI for the year?
3. Based on Hamilton's required rate of return of 8%, what was the property/casualty division's residual income for 2017?
4. Hamilton's CFO has heard about EVA and is curious about whether it might be a better measure to use for evaluating division managers. Hamilton's four divisions have similar risk characteristics. Hamilton's debt trades at book value while its equity has a market value approximately 150% that of its book value. The company's cost of equity capital is 10%. Calculate each of the following components of EVA for the property/casualty division, as well as the final EVA figure:
a. Net operating profit after taxes
b. Weighted-average cost of capital
c. Investment, as measured for EVA calculations