Standard Media has a required rate of return of 5 percent, a cost of capital of 4 percent, and an income tax rate of 30 percent.The following information about its two divisions has been provided by management: $\begin{array}{lrr}&\text { Audio Division}&\text { Video Division }\
\text { NOPAT } & \$ 1,400,000 & \$ 2,000,000 \
\text { Sales } & \$ 10,000,000 & \$ 12,500,000 \
\text { Invested capital } & \$ 15,000,000 & \$ 17,500,000
\end{array}$ How much is the residual income of the Audio Division?
A)$600,000
B)$650,000
C)$800,000
D)$2,000,000

Question

Standard Media has a required rate of return of 5 percent, a cost of capital of 4 percent, and an income tax rate of 30 percent.The following information about its two divisions has been provided by management: $\begin{array}{lrr}&\text { Audio Division}&\text {  Video Division }\
\text { NOPAT } & \$ 1,400,000 & \$ 2,000,000 \
\text { Sales } & \$ 10,000,000 & \$ 12,500,000 \
\text { Invested capital } & \$ 15,000,000 & \$ 17,500,000
\end{array}$ How much is the residual income of the Audio Division?
A)$600,000
B)$650,000
C)$800,000
D)$2,000,000

Quizplus · Accepted Answer

Residual income is calculated as NOPAT minus the product of the cost of capital and the invested capital. For the Audio Division, it is $1,400,000 - (0.04 * $15,000,000) = $1,400,000 - $600,000 = $800,000.

Standard Media Has a Required Rate of Return of 5