Question

Can you explain question c?

Question #1: Assume the Brando Division of MH Enterprises, Inc. had the following results this past year (expressed in thousands). The company’s management has a required rate of return of 10% and MH Enterprises’ weighted average cost of capital is 8%.. Mh Enterprises’ effective tax rate is 30%.

           

Sales	$3,000,000
Operating income	$500,000
Total assets	$4,500,000
Current liabilities	$300,000

                       

1. What is Brando Division’s return on investment? Be sure to show your work!
2. What is Brando Division’s residual income? Be sure to show your work!
3. Which is a better measure (ROI or residual income) to evaluate a Division’s performance. (Please note that you will need to research the advantages and disadvantages of ROI vs Residual Income. This question is not an opinion question.)

Answer 1

a return on investment = operating income total assets = 500000 4500000 11.11% b residual income = operating income - (expected return on total assets) = 500000 - (4500000*10%) = 500000-450000 = 50000 ROI is better measure to evaluate the divisions performance. residual income just provides result based on return actually earned and expected. whereas ROI measures performace as a whole and provides a result in percentage. which will help the firm to evaluate its performace is upto mark or not. с

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