Answered: The AAA Division has permanent current…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter16: Working Capital Policy And Short-term Financing

Section: Chapter Questions

Problem 4P

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The AAA Division has permanent current assets of P50,000 and operating non-current assets of 350,000. It provides annual operating income after tax of P100,000. Its cost of capital is 15% but the minimum required rate of return by the entity is 16%.

1. How much is its current return on investment?

2. How much is its economic value added?

3. How much is its residual income?

4. Assume that the Senna Division is presented by the head office to manage a P60,000 investment option yielding a 20% return on its investment. Should the Division agree to manage this investment opportunity?

A. Yes, because the ROI will increase.

B. Yes, because the RI and EVA will increase.

C. No, because the ROI will decrease.

D. No, because the RI and EVA will decrease.

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