Q 2 (12 marks) Gideon Corp. is a reinsurance and financial services company. Gideon strongly believes in evaluating the performance of its stand-alone divisions using financial metrics such as ROI and residual income. For the year ended December 31, 2019, Gideon’s CFO received the following information about the performance of the property/casualty division: Sales Revenues $ 900 000 Operating Income 225 000
Q 2 (12 marks) Gideon Corp. is a reinsurance and financial services company. Gideon
strongly believes in evaluating the performance of its stand-alone divisions using financial
metrics such as ROI and residual income. For the year ended December 31, 2019, Gideon’s
CFO received the following information about the performance of the property/casualty
division:
Sales Revenues $ 900 000
Operating Income 225 000
Total Assets 1 500 000
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Current Liabilities 300 000
Debt (Interest rate: 5%) 400 000
Common Equity (book value) 500 000
For the purposes of divisional performance evaluation, Gideon defines investment as total
assets, and income as operating income (that is, income before interest and taxes). The firm
pays a flat rate of 25% in taxes on its income.
Required:
1. What was the net income after taxes of the property/casualty division? (4 marks)
2. What was the division’s ROI for the year? (4 marks)
3. Based on Gideon’s required
division’s residual income for 2019? (4 marks
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