Tomlinson Tech has a cost of capital of 8 percent, a required rate of return of 9.5 percent, and an income tax rate of 30 percent.The Consumer Division of Tomlinson Tech has assets totaling $2,800,000 and current liabilities at $180,000 with $40,000 of this amount being interest-bearing.Sales for the year totaled $1,900,000 and interest expense totaled $20,000.Net income was $166,500 for the year.How much is the Consumer Division's residual income/(loss)?
A)($32,300)
B)($72,200)
C)($46,300)
D)None of these answer choices are correct.

Question

Quizplus · Accepted Answer

Residual income = Net income - (Cost of capital * Assets)= $166,500 - (0.08 * $2,800,000)= $166,500 - $224,000= -$57,500After-tax cost of debt = Interest expense * (1 - Tax rate)= $20,000 * (1 - 0.30)= $14,000Residual income = Net income - (Cost of capital * Assets) + (After-tax cost of debt * Liabilities)= -$57,500 + ($14,000 * $180,000)= -$57,500 + $252,000= $194,500= -$32,300

Tomlinson Tech Has a Cost of Capital of 8 Percent