PROBLEM 1

Lighthouse Transport Company

TRUCK RENTAL DIVISION TRANSPORTATION DIVISION
TOTAL ASSETS ₱ 650,000 ₱ 950,000
CURRENT LIABILITIES ₱ 120,000 ₱ 200,000
OPERATING INCOME ₱ 75,000 ₱ 160,000

REQUIREMENTS

1 OPERATING INCOME
LESS: RETURN OF INVESTMENT
INVESTMENT
TOTAL ASSETS ₱ 650,000
LESS: CURRENT LIABILITIES ₱ 120,000 ₱ 530,000
MULTIPLY B Y: REQUIRED RATE OF RETURN 0.12
RESIDUAL INCOME FOR TRUCK RENTAL DIVISION

OPERATING INCOME
LESS: RETURN OF INVESTMENT
INVESTMENT
TOTAL ASSETS ₱ 950,000
LESS: CURRENT LIABILITIES ₱ 200,000 ₱ 750,000
MULTIPLY B Y: REQUIRED RATE OF RETURN 0.12
RESIDUAL INCOME FOR TRANSPORTATION DIVISION

2 AFTER-TAX COST OF DEBT FINANCING 1-0.40 X 10% 6%

AFTER-TAX COST OF EQUITY FINANCING 15%

C
AFTER-TAX COST OF DEBT FINANCING 6%
MULTIPLY BY : MARKET VALUE OF LONG TERM DE ₱ 900,000 ₱ 54,000
AFTER-TAX COST OF EQUITY FINANCING 15%
MULTIPLY BY : MARKET VALUE OF EQUITY CAPITA ₱ 600,000 ₱ 90,000
DIVIDED BY : LONG TERM DEBT ₱ 900,000
EQUITY CAPITAL ₱ 600,000
WEIGHTED AVERAGE COST OF CAPITAL

AFTER-TAX OPERATING INCOME TRUCK RENTAL DIVISION

TRUCK RENTAL DIVISION 75000X0.6 ₱ 45,000
TRANSPORTATION DIVISION 160000X0.6 ₱ -
LESS: COST OF CAPITAL
TRUCK RENTAL DIVISION 10% X 650000-120000 ₱ 53,000
TRANSPORTATION DIVISION 10% X 950000-200000 ₱ -
ECONOMIC VALUE ADDED -₱ 8,000
3 IN RESIDUAL INCOME, BOTH DIVISION HAVE POSITIVE INCOME WHEREIN THE TRANSPORTATION DIVISION HAS
HIGHER RESIDUAL INCOME WITH P 70,000. BUT USING ECONOMIC VALUE ADDED THE TRUCK DIVISION HAS
NEGATIVE WHICH INDICATES THAT INCOME AFTER TAX OF THE DIVISION IS NOT ENOUGH TO COVER THE
COST OF CAPITAL OF ITS DIVISON. WHILE THE TRANSPORTATION THERE IS AN EXCESS OF P 21,000
AFTER COVERING THE COST OF CAPITAL.

AFTER-TAX COST OF DEBT FINANCING 9%

MULTIPLY BY : MARKET VALUE OF LONG TERM DE 10000000 900000
AFTER-TAX COST OF EQUITY FINANCING 12%
MULTIPLY BY : MARKET VALUE OF EQUITY CAPITA 8000000 960000
DIVIDED BY : LONG TERM DEBT 10000000
EQUITY CAPITAL 8000000
WEIGHTED AVERAGE COST OF CAPITAL

AFTER-TAX OPERATING INCOME 75% 960000

TRUCK RENTAL DIVISION 0.1033 3800000
TRANSPORTATION DIVISION
LESS: COST OF CAPITAL
TRUCK RENTAL DIVISION
TRANSPORTATION DIVISION
ECONOMIC VALUE ADDED
PORTATION DIVISION

₱ 75,000

₱ 63,600
₱ 11,400

₱ 160,000

₱ 90,000
₱ 70,000

₱ 144,000

₱ 1,500,000
10%

TRANSPORTATION DIVISION
₱ -
₱ 96,000

₱ -
₱ 75,000
₱ 21,000
 SPORTATION DIVISION HAS
HE TRUCK DIVISION HAS
OUGH TO COVER THE
S OF P 21,000
75% 12% 9%
12%

1860000

18000000
10%

720000
392540
327460