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compute the residual rate of return by dividing the residual income by the average o 649451

ROI AND RESIDUAL INCOME

A multinational corporation has a number of divisions, two of which are the Pacific Rim Division and the European Division. Data on the two divisions are as follows:

 

Pacific Rim

European

Average operating assets

900,000

9,000,000

Operating income

126,000

1,350,000

Minimum required return

12%

12%

Required:

1. Compute residual income for each division. By comparing residual income, is it possible to make a useful comparison of divisional performance? Explain.

2. Compute the residual rate of return by dividing the residual income by the average operating assets. Is it possible now to say that one division outperformed the other? Explain.

3. Compute the return on investment for each division. Can we make meaningful comparisons of divisional performance? Explain.

4. Add the residual rate of return computed in Requirement 2 to the required rate of return. Compare these rates with the ROI computed in Requirement 3. Will this relationship always be the same?

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