Assume division 1 of the XYZ Company had the following results last year (in thousands). Management's required rate of return is 8% and the weighted average cost of capital is 6%. Its effective tax rate is 30%.
$$\begin{array} { | l | r | }
\hline \text { Sales } & \$ 5,000,000 \
\hline \text { Operating income } & \$ 1,000,000 \
\hline \text { Total assets } & \$ 10,000,000 \
\hline \text { Current liabilities } & \$ 500,000 \
\hline
\end{array}$$ What is the division's residual income?
A) $100,000
B) $200,000
C) $500,000
D) $800,000

Question

Assume division 1 of the XYZ Company had the following results last year (in thousands). Management's required rate of return is 8% and the weighted average cost of capital is 6%. Its effective tax rate is 30%.
$$\begin{array} { | l | r | } 
\hline \text { Sales } & \$ 5,000,000 \
\hline \text { Operating income } & \$ 1,000,000 \
\hline \text { Total assets } & \$ 10,000,000 \
\hline \text { Current liabilities } & \$ 500,000 \
\hline
\end{array}$$ What is the division's residual income?
A) $100,000
B) $200,000
C) $500,000
D) $800,000

Quizplus · Accepted Answer

Residual income is calculated as operating income minus the product of the required rate of return and total assets. Here, it's $1,000,000 - (8%	imes$10,000,000) = $1,000,000 - $800,000 = $200,000.

Assume Division 1 of the XYZ Company Had the Following