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Estimate each division eva

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Question - Having just returned from a stimulating seminar stressing the virtues of EVA in strategic decision making, the Vice President of Corporate Development for Venture Telecommunications, Inc. askes his assistant to gather data necessary to calculate last year's EVA for two company divisions. The Voice Division is home to the company's traditional businesses, while the Data Division houses the firm's newer initiatives. Voice is much larger than Data, but Data is growing more rapidly. The assistant is uncertain about how to best measure the capital devoted to each division but decides to use division assets as reported in the company's annual report. To estimate each division's cost of capital she uses the median cost of capital of several pure-play competitors of each division. The company's marginal tax rate is 40%. The following is the information compiled by the assistant: Earning before interest and taxes (Voice Division) $220 million , (Data Division) $130 million. Division Assets (Voice Division) $1,000 million (Data Division) $600 million. Division cost of capital (Voice Division) 10% , (Data Division) 15%.

Within minutes of seeing these figures, the VP of Development exclaims "I knew it. The Data Division is bleeding us dry. I am going to recommend we dump that division immediately!"

a. Estimate each division's EVA.

b. Do you agree with the VP of Development? Should the company immediately eliminate the Date Division? Why of why not?

Reference no: EM133121783

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