How could the instrument division be having a higher return

Reference no: EM133325666

Question (a) In the Chestnut foods company (Case I4), the Instruments Division's Return on Capital was Nisher than the company WACC of 7%, while the Foods Division's Return on Capital was lower than the company WACC. Based on this information, It could be concluded that the Instruments Division had a higher EVA ( economic value added) compared to the Foods Division.

How could the instrument Division be having a higher return on capital and reducing value for the firm at the same time ( as felt by the activist investor ( Van Muur)?

Question (b) In Exhibit 4, suppose the ConAgra Foods and Hormel Foods were considered as the best representations for the Foods Division for Chestnut. Using the information from exhibit 4 and exhibit 3, obtain the WACC for ConAgra Foods and Hormel Foods (Use the 10 year Treasury Bond as the risk free rate).

Take the average of the WACC of ConAgra and Hormel to get an estimate of the WACC of the Foods Division of Chestnut. Comparing your estimated WACC with the given Return on Capital of the Chestnut Foods Division (= 6.3%) will the Foods Division of Chestnut be adding value to the firm?

Reference no: EM133325666

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