Sherwin Corporation has three business segments: paint, wallpapers, and tools. The company's assumed
cost of capital is 10%. Financial information about each segment follows.
Paint Segment Wallpaper Segment Tools Segment
Paint Segment |
Wallpaper Segment |
Tools Segment |
|
Segment operating income |
$680,000 |
$480,000 |
$800,000 |
Invested capital |
6,000,000 |
3,800,000 |
8,000,000 |
(a) Calculate residual income for each segment.
(b) Assuming a reduction in assumed cost of capital to 5%, prepare a revised analysis of residual
income. Does this revised assumption alter the rankings?
A. |
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B. |
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C. |
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D. |
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E. |
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F. |
None of the above |
Residual Income = Operating income - Average Invested Assets*Required rate of return | |||
Paint | Wallpaper | Tools | |
RI | 80000 | 100000 | 0 |
4b | 380000 | 290000 | 400000 |
Yes, will alter | |||
Answer is B |
Sherwin Corporation has three business segments: paint, wallpapers, and tools. The company's assumed cost of capital...