Chapter 11 Sol - Part 2

Chapter 11 Sol - Part 2 - Exercise117(30minutes...

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Exercise 11-7  (30 minutes) 1. Computation of ROI. Division A: $300,000    ×   $6,000,000 =     5% × 4 = 20%        $6,000,000     $1,500,000 Division B: $900,000    ×   $10,000,000 =     9% × 2 = 18%      $10,000,000      $5,000,000 Division C: $180,000    ×   $8,000,000 = 2.25% × 4 = 9%      $8,000,000     $2,000,000 2. Division A Division B Division C Average operating assets. ... $1,500,000 $5,000,000 $2,000,000 Required rate of return. ........ ×                15%     ×                18%     ×                12%     Required operating income. . $        225,000     $        900,000     $        240,000     Actual operating income. ..... $  300,000 $  900,000 $  180,000 Required operating income  (above). .............................       225,000           900,000             240,000     Residual income. ................. $          75,000     $                          0    $          (60,000)    
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Exercise 11-7  (continued) 3. a. and b. Division A Division B Division C Return on investment (ROI). .. 20% 18% 9% Therefore, if the division is  presented with an  investment opportunity  yielding 17%, it probably  would. .................................. Reject Reject Accept Minimum required return for  computing residual income. 15% 18%
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Chapter 11 Sol - Part 2 - Exercise117(30minutes...

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