The Pasta Division of Whole Grain Corporation had sales of $9,000,000 and operating income of $1,620,000 last year. The total assets of the Pasta Division were $2,500,000, while current liabilities were $350,000. Whole Grain Corporation's target rate of return is 18%, while its weighted average cost of capital is 10%. The effective tax rate for the company is 45%. What is the Pasta Division's Return on Investment (ROI)?
A)18.00%
B)3)89%
C)64.80%
D)360.00%

Question

Quizplus · Accepted Answer

ROI = Operating Income / Total Assets
ROI = $1,620,000 / $2,500,000
ROI = 0.648 or 64.80%

To determine if the division is meeting the target rate of return, we need to compare the ROI to the target rate of return of 18%. Since the ROI is lower than the target rate of return, the Pasta Division is not meeting the company's expectations.

The Pasta Division of Whole Grain Corporation Had Sales of $9,000,000