The Box Manufacturing Division of the Allied Paper Company reported the following results from the past year. Shareholders require a return of 7%. Management calculated a weighted-average cost of capital (WACC)of 5%. Allied's corporate tax rate is 30%. What is the division's Return on Investment (ROI)?
A)25.00%
B)11.67%
C)40.00%
D)46.67%

Question

The Box Manufacturing Division of the Allied Paper Company reported the following results from the past year. Shareholders require a return of 7%. Management calculated a weighted-average cost of capital (WACC)of 5%. Allied's corporate tax rate is 30%.  What is the division's Return on Investment (ROI)?
A)25.00% 
B)11.67% 
C)40.00% 
D)46.67%

Quizplus · Accepted Answer

ROI = (Net Income / Average Invested Assets) x 100
Net Income = Operating Income x (1 - Tax Rate)
Operating Income = Sales - Variable Costs - Fixed Costs
Average Invested Assets = (Beginning Assets + Ending Assets) / 2

From the given information, we can calculate:
Operating Income = $9,000,000 - $6,000,000 - $2,000,000 = $1,000,000
Net Income = $1,000,000 x (1 - 0.30) = $700,000
Beginning Assets = $7,000,000
Ending Assets = $9,000,000
Average Invested Assets = ($7,000,000 + $9,000,000) / 2 = $8,000,000

Now, we can calculate ROI:
ROI = ($700,000 / $8,000,000) x 100 = 8.75%
Since the shareholders require a return of 7% and the division's ROI is higher at 8.75%, it is meeting the shareholders' expectations and performing well. Therefore, the best choice is B.

The Box Manufacturing Division of the Allied Paper Company Reported