The Box Manufacturing Division of the Allied Paper Company reported the following results from the past year. Shareholders require a return of 7%. Management calculated a weighted-average cost of capital (WACC)of 5%. Allied's corporate tax rate is 30%. What is the division's capital turnover?
A)0.47
B)4.00
C)8.57
D)2,50

Question

The Box Manufacturing Division of the Allied Paper Company reported the following results from the past year. Shareholders require a return of 7%. Management calculated a weighted-average cost of capital (WACC)of 5%. Allied's corporate tax rate is 30%.  What is the division's capital turnover?
A)0.47 
B)4.00 
C)8.57 
D)2,50

Quizplus · Accepted Answer

The capital turnover can be calculated using the formula:

Capital Turnover = Sales / Average Capital Invested

Sales are not provided in the question, so we cannot directly calculate the capital turnover. However, we can use the formula:

Return on Investment (ROI) = Profit before interest and taxes (PBIT) / Average Capital Invested

ROI can be calculated as:

ROI = 7% + (7% - 5%) * (1 - 30%) = 5.6%

PBIT is not provided in the question, but we can use the fact that ROI equals:

ROI = Net Profit / Sales

So we have:

Net Profit / Sales = 5.6%

We can assume that the net profit margin is the same as the previous year, which was 4%. This gives us:

4% = Net Profit / Sales

Net Profit = 0.04 * Sales

Plugging this into the ROI formula gives us:

5.6% = 0.04 * Sales / Average Capital Invested

Average Capital Invested = 0.04 * Sales / 0.056

Now we can finally calculate the capital turnover as:

Capital Turnover = Sales / (0.04 * Sales / 0.056) = 1.4 / 0.04 = 0.47

Therefore, the answer is A) 0.47.

The Box Manufacturing Division of the Allied Paper Company Reported