Which of the following statement(s)is/are true? (A)If a division's return on investment (ROI)exceeds its cost of capital,then its residual income is positive.(B)If a division's cost of capital equals its return on investment (ROI),then its residual income is zero.
A) Only (A)is true.
B) Only (B)is true.
C) Both (A)and (B)are true.
D) Neither (A)and (B)is true.

Question

Quizplus · Accepted Answer

(A) If a division's ROI exceeds its cost of capital, then its residual income is positive because residual income is calculated as net income minus the cost of capital multiplied by the division's assets. If ROI is higher than the cost of capital, then the net income will be higher and the difference between the net income and the cost of capital multiplied by assets will be positive. 
(B) If a division's cost of capital equals its ROI, then its residual income is zero because in this case, net income will only be enough to cover the cost of capital and there will be no excess to generate positive residual income.

Which of the Following Statement(s)is/are True? (A)If a Division's Return