The FGH Company has an asset turnover of 3.0 times,using assets of $45,000.The company also has a return on investment (ROI)of 20%.If the residual income was $2,250,what was the company's cost of capital?
A)6.0%.
B)10.0%.
C)15.0%.
D)20.0%.

Question

Quizplus · Accepted Answer

Residual income = Net income - (cost of capital x assets)
Given, ROI = Net income / Assets
20% = Net income / $45,000
Net income = $9,000

Residual income = $2,250
$2,250 = $9,000 - (cost of capital x $45,000)
Cost of capital = 15% (Option C)

The FGH Company Has an Asset Turnover of 3