International Tennis (IT) has three divisions – New York (parent), London (primarily sales) and Guangzhou, China (production). IT has two sources of funds: long term debt with a value of $32 million issued at an interest rate of 10%, and equity capital that has a value of $18 million. The cost of equity capital for IT is 15%, and its tax rate is 30%. After conferring with the Cost 2 class at USF, IT allocated some corporate charges from the Parent to the operation entities. The division’s results for 2020, after allocations, are as follows:
Operating Income Assets Current Liabilities
London $2,000,000 $20,000,000 $2,500,000
China 4,500,000 30,000,000 3,500,000
New York (`1,500,000) 7,000,000 1,000,000
a. Compute IT’s pretax and after tax weighted average cost of capital.
b. Compute each division’s residual value and Economic Value Added. Use total assets as the investment base for residual income.
c. Compute each division’s pretax return on investment, using Assets as the investment base.
d. Formulate a letter from the CEO of IT to its Board of Directors explaining the results for the year. Refer back to Part 1 of this case for budgeted data for each division, and Part 2 for allocations that were made. Include discussion of the pandemic with regards to operations, and why it could have affected the divisions differently.
Please have four worksheets within one workbook:
(1) Input and conclusion (conclusion is answer to d above). Format your numerical results as follows:
(2) WACC (requirement a)
(3) Residual value and EVA (requirement b)
(4) ROI (requirement c)
Link data from input worksheet to calculation worksheets. Be sure to make the worksheets easy to understand, in other words, make sure I can follow it without going into your formulas.
Linking for input page to calculations pages 1
Workpapers are easy to follow 2
Correct method and answers for a, b, c above 9
Well worded conclusion with proper spelling and grammar 3
Total points 15