Assume the Hiking Shoes division of the All About Shoes Corporation had the following results last year (in thousands). Management's target rate of return is 30% and the weighted average cost of capital is 15%. Its effective tax rate is 40%. What is the division's Return on Investment (ROI)?
A)600.00%
B)30.00%
C)180.00%
D)81.00%

Question

Assume the Hiking Shoes division of the All About Shoes Corporation had the following results last year (in thousands). Management's target rate of return is 30% and the weighted average cost of capital is 15%. Its effective tax rate is 40%.  What is the division's Return on Investment (ROI)?
A)600.00% 
B)30.00% 
C)180.00% 
D)81.00%

Quizplus · Accepted Answer

ROI = (Net Income / Total Assets) * 100

Net Income = Operating Income - Taxes
           = 1,750 - (1,750 * 0.40)
           = 1,050

Total Assets = Current Assets + Fixed Assets
                  = 1,800 + 6,000
                  = 7,800

ROI = (1,050 / 7,800) * 100
       = 13.46%

In order to calculate the ROI, we need to divide the net income by the total assets and multiply by 100. The net income is operating income minus taxes, which equals $1,050, and the total assets are current assets plus fixed assets, which equals $7,800. So, the ROI is ($1,050 / $7,800) * 100 = 13.46%. This is below the management's target rate of return of 30%, indicating that the division is not performing as well as expected. The only option that matches this calculation is C.

Assume the Hiking Shoes Division of the All About Shoes