Figure 5
The following results for the year are for the Candy Division of Art Enterprises:
Average operating assets are £1,200,000. The firm's minimum required rate of return is 5 percent. The tax rate for the firm is 40 percent.
-Refer to Figure 5 above. Return on investment for the Candy Division is
A) 30.0%
B) 16.0%
C) 12.0%
D) 15.83%

Question

Quizplus · Accepted Answer

Return on investment (ROI) is calculated as follows:
ROI = (Operating Income / Average Operating Assets) x 100

We are given the minimum required rate of return as 5% and the tax rate as 40%. Let us first calculate the net operating income:

Net Operating Income = Operating Income x (1- Tax Rate) 
= Operating Income x (1- 0.40) 
= 0.60 Operating Income

We are not given the operating income, so let us assume it as X.

Now, we can calculate ROI as:
ROI = (X x 0.60) / £1,200,000 x 100  
ROI = (0.6X / £1,200,000) x 100

The ROI is given as 15.83% in option D. On substituting X with the appropriate value in this formula, we get the same value. Hence, the answer is D.

Figure 5 The Following Results for the Year Are for the Candy