ROI and Residual Income:Basic Computations Watkins Associated Industries is a hi
ID: 2460945 • Letter: R
Question
ROI and Residual Income:Basic Computations
Watkins Associated Industries is a highly diversified company with three divisions: Trucking, Seafood, and Construction. Assume that the company uses return on investment and residual income as two of the evaluation tools for division managers. The company has a minimum desired rate of return on investment of 10 percent with a 30 percent tax rate. Selected operating data for three divisions of the company follow.
(a) Compute the return on investment for each division. (Round answers to three decimal places.)
Trucking ROI = Answer
Seafood ROI = Answer
Construction ROI = Answer
(b) Compute the residual income for each division.
Explanation / Answer
RI = Operating Income - (Operating Assets x Target Rate of Return)
ROI= Operating income / Operating Assets x 100
Particulars
Trucking
Seafood
Construction
EBIT(Operating Income)
99,000
58,000
57,000
Less: Income Tax @ 30%
29,700
17,400
17,100
Net Income
69,300
40,600
39,900
Operating Assets
500,000
230,000
380,000
Less: Equity charge @ 10%(Minimum Level)
50,000
23,000
38,000
Residual Income
19,300
17,600
1,900
ROI
19.8
25.22
15.00
Particulars
Trucking
Seafood
Construction
EBIT(Operating Income)
99,000
58,000
57,000
Less: Income Tax @ 30%
29,700
17,400
17,100
Net Income
69,300
40,600
39,900
Operating Assets
500,000
230,000
380,000
Less: Equity charge @ 10%(Minimum Level)
50,000
23,000
38,000
Residual Income
19,300
17,600
1,900
ROI
19.8
25.22
15.00
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