Consider the following data (in millions) from Trident Financial, Inc., which ha

Question

Consider the following data (in millions) from Trident Financial, Inc., which has two main divisions, mortgage loans and consumer loans:

2.

Trident uses residual income (RI) as a measure of the financial performance of its divisions. What is the RI for each division if the minimum desired rate of return is: (a) 10%, (b) 15%, and (c) 20%? (Leave no cells blank. Enter "0" wherever required. Do not round intermediate calculations. Negative amounts should be indicated by a minus sign. Enter your answers in millions, rounded to nearest whole number.)

Mortgage Loans Consumer Loans   Average total assets $ 2,300 $ 18,750   Operating income $ 483 $ 2,250   Return on investment (ROI) 21.00 % 12.00 %

2.

Trident uses residual income (RI) as a measure of the financial performance of its divisions. What is the RI for each division if the minimum desired rate of return is: (a) 10%, (b) 15%, and (c) 20%? (Leave no cells blank. Enter "0" wherever required. Do not round intermediate calculations. Negative amounts should be indicated by a minus sign. Enter your answers in millions, rounded to nearest whole number.)

Explanation / Answer

Answer a.

Mortgage Loans:

Average Total Assets = $2,300
Operating Income = $483
desired rate of return = 10%

Residual Income = Operating Income - desired rate of return * Average Total Assets
Residual Income = $483 - 10% * $2,300
Residual Income = $253

Consumer Loans:

Average Total Assets = $18,750
Operating Income = $2,250
desired rate of return = 10%

Residual Income = Operating Income - desired rate of return * Average Total Assets
Residual Income = $2,250 - 10% * $18,750
Residual Income = $375

Answer b.

Mortgage Loans:

Average Total Assets = $2,300
Operating Income = $483
desired rate of return = 15%

Residual Income = Operating Income - desired rate of return * Average Total Assets
Residual Income = $483 - 15% * $2,300
Residual Income = $138

Consumer Loans:

Average Total Assets = $18,750
Operating Income = $2,250
desired rate of return = 15%

Residual Income = Operating Income - desired rate of return * Average Total Assets
Residual Income = $2,250 - 15% * $18,750
Residual Income = -$563

Answer c.

Mortgage Loans:

Average Total Assets = $2,300
Operating Income = $483
desired rate of return = 20%

Residual Income = Operating Income - desired rate of return * Average Total Assets
Residual Income = $483 - 20% * $2,300
Residual Income = $23

Consumer Loans:

Average Total Assets = $18,750
Operating Income = $2,250
desired rate of return = 20%

Residual Income = Operating Income - desired rate of return * Average Total Assets
Residual Income = $2,250 - 20% * $18,750
Residual Income = -$1,500

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