Marden Company Group 4

MARDEN COMPANY Marden company is an strategic business unit (SBU), using RI i.e. residual income is a  better method of measuring the performance o f assets in relation to the utilization of  assets by division manager. Assumptions: Since, Interest on debt is 9% therefore interest on equ ity would be more than that on debt. d ebt. Hence we assume it to be 12%. The applicable corporate tax rate in India is 30%. Hence we use the same in Marden Co.¶s case. Calculations, k e= 12% k d= 9% Equity (E) = Rs 1300/Debt (D) = Rs 700/Therefore, E+D = Rs 2000/EVA (RI) = NOPAT ± (WACC* Capital employed) Where, EVA is economic value added  NOPAT is net operating profit after tax And WACC is weighted avg. cost of capital  NOPAT= PBT*(1-T c) = Rs. 420 WACC= [(E/ (E+D)) * k e ] + [(D/(E+D)) * k d ] By calculating the above WACC is equal to 9.2% Capital employed= (fixed asset + current asset) ± current liabilities liabilities Hence capital employed = 600+1800- 400= Rs. 2000 EVA= Rs. 420- (9.2%*2000) = Rs. 420- 184= Rs 236 Calculation of ROI ROI= income/ asset employed employed ROI= 600/2400= 0.25 That is equal to 25%

If the company sets 30% as its minimum RoI then inspite of have a huge return might not invest this excess in development or expansion. EVA against this, since the return in more than cost of capital tied up, will suggest the higher return can be reinvested. E VA also shows a stronger co-relation with changes in co mpany¶s market value. For a company shareholders are very important especially when making decisions related to 1) reducing risk  2) merger or acquisition 3) reducing cost of capital. Shareholders earning can be reinvested where as totaling assets does not show ratio  between debt, equity and t heir related costs. The relation with assets invested, in RoI shows relative increase in earning but cannot be used if reducing cost of capital.