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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