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 4,070,028

Result

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: - ROI
MAC 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
Accumulated
Building 5,00,000 Depreciation
Investment 1,00,000 Building 2,50,000
Plant 2,00,000 Plant 1,50,000
Patents 50,000 Creditors 40,000
Cash 25,000 Loans 50,000
Receivables 75,000 Provision for Taxes 10,000
Stocks 2,50,000 Share Capital 2,50,000
Cost of Goods Sold 4,50,000 Reserves 2,50,000
Other 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

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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-EVA

The 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 –
Division
Budget Data J K L

1997 budgeted profit 90000 55000 50000

1997 budgeted Current Assets 100000 200000 300000
1997 budgeted Fixed Assets 400000 400000 500000

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Actual Data
1997 Profits 80000 60000 50000
1997 Current Assets 90000 190000 350000
1997 Fixed Assets 400000 450000 550000

Find –
A. Calculate objective ROI and Actual ROI
B. Calculate objective RI and Actual RI find variation
C. 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 L
Profit 90 55 50
Current Assets 100 200 300
Fixed Assets 400 400 500
Total 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 15
Capital Charge 10% of FA 40 40 50
Total Charge 45 50 65
Residual Income (RI) 45 5 -15

Computation of ROI Actual

Actual 97 J K L
Profit 80 60 50
Current Assets 90 190 350
Fixeds 400 450 550
Total 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 17.50
Capital Charge 10% of FA 40 45 55
Total Charge 44.50 54.50 72.50
Residual 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 10,000

Revised ROI Computations Revised RI Computations

Actual 97 J K L J K L
Profit 90 70 60Profit 90 70 60
Current Assets 90 190 350Capital Charge 5% of C A 4.5 9.5 17.5
Fixeds 500 550 650Capital Charge 10% of FA 50 55 65
Total Assets 490 640 900Total 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 7,000

Revised ROI Computations Revised RI Computations
Actual 97 J K L J K L
Profit 87 67 57 Profit 87 67 57
Current Assets 90 190 350 Capital Charge 5% of C A 4.5 9.5 17.5
Fixeds 500 550 650 Capital Charge 10% of FA 50 55 65
Total 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 Computations

Actual 97 J K L J K L
Profit 75 55 45Profit 75 55 45
Current Assets 40 140 300Capital Charge 5% of C A 2 7 15
Fixeds 400 450 100Capital Charge 10% of FA 40 45 10
Total Assets 490 640 900Total 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 Computations

Actual 97 J K L J K L
Profit 72.5 52.5 42.5 Profit 72.5 52.5 42.5
Current Assets 90 190 350 Capital Charge 5% of C A 4.5 9.5 17.5
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Fixeds 325 375 25 Capital Charge 10% of FA 32.5 37.5 2.5
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 & EVA

XYZ company has three divisions X,Y & Z. For the current year, the following data were
reported –
X Y Z
Sales Revenue (Rs) 800000 ? ?
Profit (Rs) 80000 640000 ?
200000
Investment (Rs) 400000 ? 0
Investment Turnover ? 4 ?
Margin of Profit on Sale ? ? 15
ROI ? 20 ?
Residual Income ? ? 202000
(10% cost of capital)

Required –
1. Complete the table
2. rank the division in terms of their effective use of resource in capturing the
market.
Solution –
X Y Z
1280000 268000
Sales Revenue (Rs) 800000 0 0
Profit (Rs) 80000 640000 402000
200000
Investment (Rs) 400000 3200000 0
Investment Turnover 2 4 1.34
Margin of Profit on Sale 10 5 15
ROI 20 20 20.1
Residual Income 40000 320000 202000
(10% cost of capital)

Problem 4: - RI
P 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

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Solution – Net Income
1. ROI (Gross Aseets) = ------------------ * 100
Gross Assets

15% = 4,50,000/GA

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

= 30,00,000
Net Income
2. ROI (Net Aseets) = ------------------ * 100
Net 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) = ------------------ * 100
Net 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 Assets

2.4 = 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 Year1
121000 100000
Sales 0 1100000 0
Cost of Goods Sold 700000 600000 500000
Operating Expenses 300000 250000 200000
Current Assets 150000 120000 100000
200000 200000 200000
Fixed Assets 0 0 0
Accumulated 140000
Depreciation 0 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.

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 Year 3 Year2 Year1
1210000.
Sales 00 1100000.00 1000000.00
700000.0
Cost of Goods Sold 0 600000.00 500000.00
300000.0
Operating Expenses 0 250000.00 200000.00
150000.0
Current Assets 0 120000.00 100000.00
2000000.
Fixed Assets 00 2000000.00 2000000.00
1400000.
Accumulated Depreciation 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

XXTRA
Problem 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 Credit
Currrent 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 asets
b. Net Assets
c. Gross Assets employed
d. Net Assets employed
e. Beginning Owner’s equity
f. Ending owner’s equity (Opn b/s + profit)

================================

Problem 8:-

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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 C

Sales 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
Long Term Liabilities 22,500.00 0.00 37,500.00

Compute –
1. Net Income for each division
2. ROI using Gross assets
3. ROI using Net assets
4. ROI using gross assets employed
5. Residual Income using a target income of 15% of net assets
6. Income as a % of sales
7. prepare a chart ranking the divisions for each of the performance
measures.