Reference no: EM133206296

Scenario

Mr. Hyde is the General Manager of STU Canada Limited which is a subsidiary of a large multinational firm that is traded on a major stock exchange. 

The parent company has responsivity for all capital expenditure decisions of the subsidiary, and can dictate if the subsidiary must discontinue operations in a market segment and sell the associated assets used in this segment

During 2019 the parent company told the subsidiary that it must discontinue product XYZ and late in 2019 STU discontinued the production and sales of product XYZ. Specific assets held for disposition and not used in 2020 total have gross value of $55,556. 

All entities are evaluated on the return on the assets invested and the required return must be at least 10% in order to earn annual bonuses which are scaled up as the ROI increases above the 10% required return. 

For purposes of ROI, fixed assets are valued at gross value and not net value.

On the next pages you see condensed summary financial statements for STU for the year ended December 31, 2020 and a proposed capital expenditure

Questions for This Scenario 

1. Comment on the appropriate return on investment calculation for Mr. Hyde and calculate the amount to 1 decimal place. 

2. Comment on the appropriate return on investment calculation for STU Limited and calculate the amount to 1 decimal place. 

3. Comment on the appropriate return on investment calculation for the large multinational firm and calculate the amount to 1 decimal place.

4. Would Mr. Hyde be motivated to make the capital investment at the present time? BRIEFLY justify your answer. 5. Do you think the bonus system suits the shareholders best interests? BRIEFLY justify your answer.

Financial Statements 

STU Canada Limited Balance Sheet as at December 31, 2020

Current assets $54,000

 Non-current assets 126,000 

Total assets $180,000

Current liabilities $30,600 

Long term debt 90,000

Equity 59,400 

Total liabilities and equity $180,000

Idle Assets $55,556 

Required return from operations based on total 10%

STU Canada Limited Income Statement for the year ended December 31, 2020 

Sales   $216,000 

Cost of sales   138,600 

Gross Margin   77,400 

Selling and Administrative   54,540

Operating income   22,860

Interest at 6%   4,860 

Net Income before tax   18,000 

Income tax   5,900 

Net income   $12,10