Great Corporation has two divisions- the Rad Division and the Club Division. The interest rate on Great's s $61 million (market value) of long-term debt is 10 percent. The company's tax rate is 40 percent. The cost of Great's equity capital is 15 percent. The market value of Great's equity is $87 million. The divisions' total assets, current liabilities, and before-tax operating income for last year are as follows: Before-Tax Current Division Total Assets Operating Liabilities Income Rad $97,000,000 $5,200,000 $ 20,600,000 Club 65,800,000 3,800,000 18,700,000 Required: For the Rad Division only: (i) Calculate the Return on Investment (ROI) percentage. Show workings. (ii) Calculate the Residual Income amount. (Minimum required rate is 12%.) Show workings. (iii) Calculate the economic value added (EVA) amount. Show workings.

Cornerstones of Cost Management (Cornerstones Series)
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Chapter10: Decentralization: Responsibility Accounting, Performance Evaluation, And Transfer Pricing
Section: Chapter Questions
Problem 11E: Xenold, Inc., manufactures and sells cooktops and ovens through three divisions: Home, Restaurant,...
Question
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Great Corporation has two divisions- the Rad Division and the Club
Division. The interest rate on Great's s $61 million (market value) of
long-term debt is 10 percent. The company's tax rate is 40 percent.
The cost of Great's equity capital is 15 percent. The market value of
Great's equity is $87 million. The divisions' total assets, current
liabilities, and before-tax operating income for last year are as follows:
Before-Tax
Current
Division
Total Assets
Operating
Liabilities
Income
Rad
$97,000,000
$5,200,000
$ 20,600,000
Club
65,800,000
3,800,000
18,700,000
Required: For the Rad Division only:
(i) Calculate the Return on Investment (ROI) percentage. Show
workings.
(ii) Calculate the Residual Income amount. (Minimum required rate is
12%.) Show workings.
(iii) Calculate the economic value added (EVA) amount. Show workings.
Transcribed Image Text:Great Corporation has two divisions- the Rad Division and the Club Division. The interest rate on Great's s $61 million (market value) of long-term debt is 10 percent. The company's tax rate is 40 percent. The cost of Great's equity capital is 15 percent. The market value of Great's equity is $87 million. The divisions' total assets, current liabilities, and before-tax operating income for last year are as follows: Before-Tax Current Division Total Assets Operating Liabilities Income Rad $97,000,000 $5,200,000 $ 20,600,000 Club 65,800,000 3,800,000 18,700,000 Required: For the Rad Division only: (i) Calculate the Return on Investment (ROI) percentage. Show workings. (ii) Calculate the Residual Income amount. (Minimum required rate is 12%.) Show workings. (iii) Calculate the economic value added (EVA) amount. Show workings.
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