Question

The Rainy Division of Seattle Corporation reported the following results from the past year. Shareholders require a retu is 25% of 5% Management calculated a weighted-average cost of captal (VACC) of 3% Rainy's corporate tax rate s000,000 Sales Operating income Total assets Current fabilties 180,000 1,300,000 300,000 What is the division's Residual Income (RI OA $115.000 OB $150,000 Oc. $30,000 OD. $180,000

Answer 1

Residual Income = Operating Income – (Target rate of return x Total assets)

                             = $ 180,000 – (5 % x $ 1,300,000)

                             = $ 180,000 – (0.05 x $ 1,300,000)

                             = $ 180,000 – $ 65,000

                             = $ 115,000

Hence option “A. $ 115,000” is correct answer.