omework Problems Help Save & Exit Subm Check my work Kerston Company has operati
ID: 2513637 • Letter: O
Question
omework Problems Help Save & Exit Subm Check my work Kerston Company has operating assets of $20,000,000. The company's operating income for the most recent accounting period was $1,600,000. The Dannica Division of Kerston controls $8,000,000 of the company's assets and earned $720,000 of its operating income. Kerston's desired ROI Is 7 percent. Kerston has $600,000 of additional funds to Invest. The manager of the Dannica division believes that his division could earn $51,000 on the additional funds The highest investment opportunity to any of the company's other divisions is 7.50 percent. Required a. Calculate the ROl of Dannica Division. (7) Before investment opportunity. (2) Only on the new investment opportunity. (3) Dannica total ROI If investment opportunity is accepted c. Calculate the Dannica Division residual income from the new investment opportunity. If residual Income is used as the sole performance measure would the manager of the Dannica Division be likely to accept or reject the additional funding? Complete this question by entering your answers in the tabs below. Required Required C Calculate the ROI of Dannica Division. (Round your answers to 2 decimal places.(e, 2345 should be entered as 23.45).) MacBook Air 5 6 8 9
Explanation / Answer
ROI of dannica division
EBIT/total of assets
(720000/8000000)
9.00%
ROI on new investment opportunity
EBIT/total of assets
(51000/600000)
8.50%
Total ROI if investment opportunity is accepted
EBIT/total of assets
(771000/8600000)
8.97%
residual income
operating income-(operating assets*cost of capital)
51000-(600000*7.5%)
6000
Yes new investment would be accepted on the basis of Residual income
ROI of dannica division
EBIT/total of assets
(720000/8000000)
9.00%
ROI on new investment opportunity
EBIT/total of assets
(51000/600000)
8.50%
Total ROI if investment opportunity is accepted
EBIT/total of assets
(771000/8600000)
8.97%
residual income
operating income-(operating assets*cost of capital)
51000-(600000*7.5%)
6000
Yes new investment would be accepted on the basis of Residual income
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