Zzwuig Multinational Inc. has divisions in Canada, Germany, and New Zealand. The Canadian division is the old est and most established of the three, and has a cost of capital of 6%. The German division was started three years ago when the exchange rate for euros was 1 € = $1.25. Although it is a large and powerful division of Zzwuig Inc., its cost of capital is 10%. The New Zealand division was started this year, when the exchange rate was 1 New Zealand Dollar (NZD) = $0.64.
Its cost of capital is 13%. Average exchange rates for the current year are 1 € = = = = == $1.32 and
1 NZD = $0.67. Other information for the three divisions includes:
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 the results among divisions.
3. Use after-tax operating income and the individual cost of capital of each division to calculate and compare residual income of each division.
4. Redo requirement 2 using pretax operating income instead of net income. Why is there a big difference, and what does it mean for performance evaluation?