St. John's Division has a required rate of return of 15%. The weighted average cost of capital is 10%. Information for St. John's Divisions operations over the past 2 years follows: 20x5 20x4
Current assets $120,000 $100,000
Property, plant and equipment (cost)300,000 280,000
Accumulated amortization 80,000 60,000
Current liabilities 90,000 70,000
Long-term debt 85,000 80,000
Pretax operating income 52,800 48,900
Income tax rate 30% 30%
What was the St. John's Division ROI for 20x5 (rounded to nearest 0.1%)?
A)11.2%
B)13.2%
C)15.5%
D)16.0%

Question

Quizplus · Accepted Answer

To calculate the ROI, we use the formula:

ROI = (Pretax operating income / Total assets) x 100%

Total assets = Current assets + Property, plant and equipment - Accumulated amortization

For 20x5:

Total assets = $120,000 + $300,000 - $80,000 = $340,000

ROI = ($52,800 / $340,000) x 100% = 15.5%

Therefore, the answer is (D).

St John's Division Has a Required Rate of Return of 15