A drawback to the use of residual income when comparing the performance of corporate divisions is that:
A) The use of residual income induces managers to use debt rather than equity financing.
B) The use of residual income leads to divisional investment decisions that are suboptimal from the perspective of the corporation.
C) Higher residual income may only indicate a larger but not better-performing division.
D) Residual income fails to take into account the corporation's weighted average cost of capital.

Question

Quizplus · Accepted Answer

Residual income is absolute and can be higher for larger divisions regardless of their efficiency or profitability, which may not accurately reflect the performance quality of a division compared to smaller ones.

A Drawback to the Use of Residual Income When Comparing