The Rainy Division of Seattle Corporation reported the following results from the past year. Shareholders require a return of 5%. Management calculated a weighted-average cost of capital (WACC)of 3%. Rainy's corporate tax rate is 25%. What is the division's Residual Income (RI)?
A)$30,000
B)$150,000
C)$115,000
D)$180,000

Question

The Rainy Division of Seattle Corporation reported the following results from the past year. Shareholders require a return of 5%. Management calculated a weighted-average cost of capital (WACC)of 3%. Rainy's corporate tax rate is 25%.  What is the division's Residual Income (RI)?
A)$30,000 
B)$150,000 
C)$115,000 
D)$180,000

Quizplus · Accepted Answer

Residual Income (RI) = Net Income - (Total Assets * WACC)
Net income = Operating income * (1 - Tax rate) = $150,000 * (1 - 0.25) = $112,500
Total Assets = $2,000,000
WACC = 3%
RI = $112,500 - ($2,000,000 * 0.03) = $115,000

The Rainy Division of Seattle Corporation Reported the Following Results