Use the information below to answer the following question(s):
Assume the Cell Phone Division of the First Electronics Corporation had the following results last year (in thousands). Management's target rate of return is 10% and the weighted average cost of capital is 7%. Its effective tax rate is 30%.

-What is the First Electronics Corporation cell phone division's Residual Income (RI)?
A) $472,500
B) $600,000
C) $690,000
D) $300,000

Question

Use the information below to answer the following question(s):
Assume the Cell Phone Division of the First Electronics Corporation had the following results last year (in thousands). Management's target rate of return is 10% and the weighted average cost of capital is 7%. Its effective tax rate is 30%.
 
-What is the First Electronics Corporation cell phone division's Residual Income (RI)?
A) $472,500 
B) $600,000 
C) $690,000 
D) $300,000

Quizplus · Accepted Answer

Residual Income (RI) = Net Operating Income - (Total Assets x Weighted Average Cost of Capital)
Net Operating Income = $2,400,000 - $1,200,000 (Operating Expenses +(-) Depreciation) = $1,200,000
Total Assets = $16,000,000
Weighted Average Cost of Capital = 7%
RI = $1,200,000 - ($16,000,000 x 0.07) = $600,000

Use the Information Below to Answer the Following Question(s)