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