Assume the Apple division of the Gala Company had the following results last year (in thousands). Managements required rate of return is 10% and the weighted average cost of capital is 8%. Its effective tax rate is 30%.
$$\begin{array} { | l | r | }
\hline \text { Sales } & \$ 3,000,000 \
\hline \text { Operating income } & \$ 500,000 \
\hline \text { Total assets } & \$ 4,500,000 \
\hline \text { Current liabilities } & \$ 300,000 \
\hline
\end{array}$$ What is Apple division's residual income?
A) $50,000
B) $140,000
C) $336,000
D) $360,000

Question

Assume the Apple division of the Gala Company had the following results last year (in thousands). Managements required rate of return is 10% and the weighted average cost of capital is 8%. Its effective tax rate is 30%.
$$\begin{array} { | l | r | } 
\hline \text { Sales } & \$ 3,000,000 \
\hline \text { Operating income } & \$ 500,000 \
\hline \text { Total assets } & \$ 4,500,000 \
\hline \text { Current liabilities } & \$ 300,000 \
\hline
\end{array}$$ What is Apple division's residual income?
A) $50,000
B) $140,000
C) $336,000
D) $360,000

Quizplus · Accepted Answer

Residual income is calculated as Operating Income - (Required Rate of Return * Total Assets). Here, it is $500,000 - (10% * $4,500,000) = $50,000.

Assume the Apple Division of the Gala Company Had the Following