Padstow Fabrics Comapny has two retail division, which reported the following re
ID: 2371545 • Letter: P
Question
Padstow Fabrics Comapny has two retail division, which reported the following results for last year:
Finishing Division Dressmakinf Division
Profit $900 000 $200 000
Average invested capital $6 000 000 $1 000 000
ROI 15% 20%
Required:
1 Which was the more successful division? Think carefully about this, and explain yoir answer.
2 Calculate each divisionn's residual income under each of the following assumptions about the firm's minimum required rate of return:
(a) 12 per cent
(b) 15 per cent
(c) 18 per cent
Explanation / Answer
1)
Here, the Dressmakinf Divison is the more successful divison because it has been able to generate return on investment of 20 % in the same amount of time as he finishing divison.
2)
a)
When firm's min required rate of return = 12%
= 12 % of $ 6,000,000 + 12% of $1,000,000
= $ 840000
Income Generated = $ 900,000 + $ 200,000
= $ 1,100,000
SO, residual income = $ 1,100,000 - $ 840,000
= $ 260,000
b)
When firm's min required rate of return = 15%
= 15 % of $ 6,000,000 + 15% of $1,000,000
= $ 1,050,000
Income Generated = $ 900,000 + $ 200,000
= $ 1,100,000
SO, residual income = $ 1,100,000 - $ 1,050,000
= $ 50,000
c)
When firm's min required rate of return = 18%
= 18 % of $ 6,000,000 + 18% of $1,000,000
= $ 1,260,000
Income Generated = $ 900,000 + $ 200,000
= $ 1,100,000
SO, residual income = $ 1,100,000 - $ 1,260,000
= - $ 160,000
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.