Zeiss Multinational, Inc., has divisions in the United States, Germany, and New Zealand. The U. S. division is the oldest and most established of the three and has a cost of capital of 6.5%. The German division was started 3 years ago when the exchange rate for the euro was 1 euro = $ 1.40. The German division is a large and powerful division of Zeiss, Inc., with a cost of capital of 10%. The New Zealand division was started this year, when the exchange rate was 1 New Zealand Dollar (NZD) – $ 0.75. Its cost of capital is 13%. Average exchange rates for the current year are 1 euro = $ 1.50 and 1 NZD = $ 0.60. Other information for the three divisions includes:
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1. Translate the German and New Zealand information into dollars to make the divisions comparable. Find the after-tax operating income for each division and compare the profits.
2. Calculate ROI using after-tax operating income. Compare among divisions.
3. Use after-tax operating income and the individual cost of capital of each division to calculate residual income and compare.
4. Redo requirement 2 using pretax operating income instead of net income. Why is there a big difference, and what does it mean for performanceevaluation?
