Consider the following data (in millions) from Trident Financial Inc., which has two main divisions, mortgage loans and consumer loans:
| Mortgage Loans | Consumer Loans | |||||
| Average total assets | $ | 1,100 | $ | 21,250 | ||
| Operating income | $ | 242 | $ | 2,550 | ||
| Return on investment (ROI) | 22.00 | % | 12.00 | % | ||
Required:
1. Based on ROI, which division is more successful?
-
Mortgage loans
-
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. Negative amounts should be indicated by a minus sign. Enter your answers in millions of dollars, rounded to nearest whole number.)
Solve:
Homework Answers
1. Mortgage Loans (as the return on investment is higher, it is more successful)
2. Residual income = Operating income - Required return
| Mortgage loans | Consumer loans | |
|---|---|---|
| 10% |
= 242-(1100*10%) = 132 |
= 2550-(21250*10%) = 425 |
| 15% |
= 242 - (1100*15%) = 77 |
= 2550-(21250*15%) = -638 (minus sign) |
| 20% |
= 242 - (1100*20%) = 22 |
= 2550-(21250*20%) = -1700 (minus sign) |
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