Which of the following statements pertaining to residual income is correct?
A) An increase in the amount invested in property, plant, and equipment will result in an increase in residual income.
B) An increase in the target rate of return will result in a decrease in residual income.
C) A negative residual income means that the operating income is in excess of the target rate of return.
D) A positive ROI means that the residual income must also be positive.

Question

Quizplus · Accepted Answer

Residual income is calculated by subtracting the cost of capital (the target rate of return multiplied by the investment) from the operating income. Therefore, if the target rate of return increases, the cost of capital increases, which, all else being equal, would decrease residual income.

Which of the Following Statements Pertaining to Residual Income Is