Figure 6
The following results for the year pertain to the Maddox Division of Ryan Ltd.:
The weighted average cost of capital is 12 percent. The firm's minimum required rate of return is 14 percent. Taxes for the firm are 40 percent.
-Refer to Figure 6. If average operating assets are £1,000,000, return on investment for the Maddox Division is

A) 48%
B) 34%
C) 18%
D) 16%

Question

Figure 6
The following results for the year pertain to the Maddox Division of Ryan Ltd.:
The weighted average cost of capital is 12 percent. The firm's minimum required rate of return is 14 percent. Taxes for the firm are 40 percent.
-Refer to Figure 6. If average operating assets are £1,000,000, return on investment for the Maddox Division is

A) 48% 
B) 34% 
C) 18% 
D) 16%

Quizplus · Accepted Answer

Return on investment (ROI) = Operating income / Average operating assets
Operating income = Sales - Operating expenses - Taxes
From the data given in Figure 6, we have:
Sales = £2,000,000
Operating expenses = £1,500,000
Taxes = 40% of (Sales - Operating expenses) = 0.4(£500,000) = £200,000
Operating income = £2,000,000 - £1,500,000 - £200,000 = £300,000
Thus, ROI = £300,000 / £1,000,000 = 0.3 or 30%
Since ROI is less than the minimum required rate of return of 14%, the Maddox Division is not meeting the company's expectations. The best choice is C, 18%, as none of the other answer choices match the calculated ROI.

Figure 6 The Following Results for the Year Pertain to the Maddox