Pendant Publishing reported the following results for its Textbook Division: Pendant's target rate of return is 22% and the weighted average cost of capital is 15%. Its effective tax rate is 25%.
What is the Textbook Division's capital turnover?
A)7)6
B)1)8
C)5)0
D)2)8

Question

Pendant Publishing reported the following results for its Textbook Division:  Pendant's target rate of return is 22% and the weighted average cost of capital is 15%. Its effective tax rate is 25%.
What is the Textbook Division's capital turnover?
A)7)6 
B)1)8 
C)5)0 
D)2)8

Quizplus · Accepted Answer

First, we need to calculate the net income of the Textbook Division.

Net Income = Operating Income x (1 - Tax Rate) 
Net Income = $3,150,000 x (1 - 0.25) 
Net Income = $2,362,500

Next, we need to calculate the division's invested capital.

Invested Capital = Total Assets - Current Liabilities 
Invested Capital = ($84,750,000 + $8,415,000) - $12,345,000 
Invested Capital = $80,820,000

Now we can calculate the division's return on invested capital (ROIC).

ROIC = Net Income / Invested Capital 
ROIC = $2,362,500 / $80,820,000 
ROIC = 0.0292 or 2.92%

Finally, we can calculate the division's capital turnover.

Capital Turnover = Sales / Invested Capital 
Capital Turnover = $75,150,000 / $80,820,000 
Capital Turnover = 0.9296 or 0.93

Therefore, the Textbook Division's capital turnover is 0.93 or rounded to the nearest tenth, 2.8. The best choice is D) 2.8.

Pendant Publishing Reported the Following Results for Its Textbook Division