Marcia Consumer Products has several divisions, including the Education Division and the Recreation Division. Data on the two divisions are shown here:
$\begin{array}{|l|r|r|}
\hline& \text { Education Division } & \text { Recreation Division } \
\hline \text { Current ROI } & 9.2 \% & 10.0 \% \
\hline \text { Current WACC } & 8.0 \% & 8.0 \% \
\hline \text { Operating income } & \$ 110,009 & \$ 200,000 \
\hline \text { Effective tax rate } & 20.0 \% & 20.0 \% \
\hline \text { Average total assets } & \$ 1,200,009 & \$ 2,000,000 \
\hline \text { Current liabilities } & \$ 30,000 & \$ 30,000\\hline
\end{array}$
These data show that the Recreation Division has generated returns in excess of those expected by the investors and creditors, but the Education Division has not.

Question

Marcia Consumer Products has several divisions, including the Education Division and the Recreation Division. Data on the two divisions are shown here:
 $\begin{array}{|l|r|r|} 
\hline& \text { Education Division } & \text { Recreation Division } \
\hline \text { Current ROI } & 9.2 \% & 10.0 \% \
\hline \text { Current WACC } & 8.0 \% & 8.0 \% \
\hline \text { Operating income } & \$ 110,009 & \$ 200,000 \
\hline \text { Effective tax rate } & 20.0 \% & 20.0 \% \
\hline \text { Average total assets } & \$ 1,200,009 & \$ 2,000,000 \
\hline \text { Current liabilities } & \$ 30,000 & \$ 30,000\\hline
\end{array}$ 
These data show that the Recreation Division has generated returns in excess of those expected by the investors and creditors, but the Education Division has not.

Quizplus · Accepted Answer

Both divisions have a current WACC of 8.0%. The Recreation Division's ROI of 10.0% exceeds this, indicating it has generated returns above expectations. The Education Division's ROI is 9.2%, also above the WACC, meaning it too has generated returns in excess of those expected by investors and creditors, contrary to the claim.

Marcia Consumer Products Has Several Divisions, Including the Education Division