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How much value is created

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Rawhajpoutalah Intl., an Indian tobacco company, has two divisions, A and B, for which the figures are as follows:

                                   Division A                     Division B

Capital employed           1000                       1000

Expected return             15%                       15%

Net operating income           50                       300

Question (a) What are the values for divisions A and B if you assume, for calculation purposes, that operating income is constant to perpetuity?

Question (B) The company pays out 50 and so finances its investments for 300. The company invests everything in division B at the same return on capital employed (30%). How much value is created?

Question (C) Same question if the 300 is invested in division A at the average rate of return of A (5%)

Question (D) Same question if the 300 is divided equally between A and B

Question (E) What are your conclusion?

Reference no: EM132575766

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