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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773

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BuyFindarrow_forward

Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
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It ROI for a division is 15% and the company's minimum required cost of capital is 18%, then

  1. a. residual income for the division is negative.
  2. b. residual income for the division takes on a value between 0 and +1.
  3. c. residual income cannot be computed.
  4. d. EVA must be negative.
  5. e. residual income is positive.

To determine

Identify the correct statement.

Explanation

Residual Income:

Residual income can be determined by deducting the minimum dollar return on the operating assets of the company from the amount of operating income.

a.

The ROI of a company is 15% which is less than the minimum required cost of capital of 18%. This means that the residual income is negative that is less than zero because the earnings of the company are less than the minimum required cost of capital. Therefore, this option is correct.

b.

The residual income of a company can be zero, less than zero or more than zero...

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