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10 January, 18:19

Izzy Division of Marine Boats Corporation had the following results last year (in thousands). Sales $4,700,000 Operating income $700,000 Total assets $3,900,000 Current liabilities $300,000 Management's target rate of return is 13% and the weighted average cost of capital is 12%. What is the Izzy Division's Residual Income (RI) ?

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  1. 10 January, 20:31
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    Izzy Division's Residual Income is $193,000

    Explanation:

    given data

    Sales = $4,700,000

    Operating income = $700,000

    Total assets = $3,900,000

    Current liabilities = $300,000

    target rate of return = 13%

    average cost of capital = 12%

    to find out

    Izzy Division's Residual Income

    solution

    first we find here Minimum required income that is express as

    Minimum required income = Total assets * Target rate of return ... 1

    Minimum required income = $ 3,900,000 * 13%

    Minimum required income = $ 507,000

    and

    now we find residual income that is express as

    Residual income = Operating income - Minimum required income ... 2

    Residual income = $700000 - $507000

    Residual income = $193,000

    Izzy Division's Residual Income is $193,000
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