The Pathways 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 is calculated as ROI minus the cost of capital, multiplied by the assets. Given ROI is 20% and residual income is $2,250, solve for the cost of capital: $2,250 = ($45,000 * (20% - cost of capital)). Solving gives a cost of capital of 15%.

The Pathways Company Has an Asset Turnover of 3