Question

Izzy Division of Marine Boats Corporation had the following results last year (in thousands). Sales $4,700,000​ Operating income $700,000​ Total assets $3,900,000​ Current liabilities $300,000​ Management's target rate of return is 13% and the weighted average cost of capital is 12%. What is the Izzy Division's Residual Income (RI)?

Answer 1

Izzy Division's Residual Income is $193,000

Step-by-step explanation:

given data

Sales = $4,700,000​

Operating income = $700,000​

Total assets = $3,900,000​

Current liabilities = $300,000​

target rate of return = 13%

average cost of capital = 12%

to find out

Izzy Division's Residual Income

solution

first we find here Minimum required income that is express as

Minimum required income = Total assets × Target rate of return ................1

Minimum required income = $ 3,900,000​ × 13%

Minimum required income = $ 507,000

and

now we find residual income that is express as

Residual income = Operating income - Minimum required income ..........2

Residual income = $700000 - $507000

Residual income = $193,000

Izzy Division's Residual Income is $193,000