Assume the Air Conditioning division of the General Appliance Corporation had the following results last year (in thousands).Management's target rate of return is 15% and the weighted average cost of capital is 10%.Its effective tax rate is 35%.

What is the division's Residual Income (RI)?
A)$1,625,000
B)$1,132,364
C)$1,750,000
D)$500,000

Question

Assume the Air Conditioning division of the General Appliance Corporation had the following results last year (in thousands) .Management's target rate of return is 15% and the weighted average cost of capital is 10%.Its effective tax rate is 35%.

What is the division's Residual Income (RI) ?

What is the division's Residual Income (RI)?
A)$1,625,000 
B)$1,132,364 
C)$1,750,000 
D)$500,000

Quizplus · Accepted Answer

A)
Operating income 2,000,000
Less Minimum acceptable income
Target rate of return 15%
Total assets × 2,500,000 (375,000)
Residual Income 1,625,000

Assume the Air Conditioning Division of the General Appliance Corporation