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: $\begin{array}{lrr}&\text { Audio Division}&\text { Video Division }\
\text { NOPAT } & \$ 1,400,000 & \$ 2,000,000 \
\text { Sales } & \$ 10,000,000 & \$ 12,500,000 \
\text { Invested capital } & \$ 15,000,000 & \$ 17,500,000
\end{array}$ As it relates to investment center evaluation, how much is the profit margin of the Video Division?
A)11.4%
B)71.43%
C)60.00%
D)16.00%

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: $\begin{array}{lrr}&\text { Audio Division}&\text {  Video Division }\
\text { NOPAT } & \$ 1,400,000 & \$ 2,000,000 \
\text { Sales } & \$ 10,000,000 & \$ 12,500,000 \
\text { Invested capital } & \$ 15,000,000 & \$ 17,500,000
\end{array}$ As it relates to investment center evaluation, how much is the profit margin of the Video Division?
A)11.4%
B)71.43%
C)60.00%
D)16.00%

Quizplus · Accepted Answer

The profit margin is calculated as NOPAT divided by Sales. For the Video Division, this is \$2,000,000 / \$12,500,000 = 0.16, or 16%.

Standard Media Has a Required Rate of Return of 5