Question

Assume the Apple division of the Gala Company had the following results last year (in thousands). Managements required rate of return is 10% and the weighted average cost of capital is 8%. Its effective tax rate is 30%. What is Apple division's residual income

Answer 1

$50,000

Step-by-step explanation:

The computation of the residual income for each division is shown below:

As we know that

Residual income = Operating income - target income

where,

Operating income is given in the question

And, the target income could be calculated by

= Average invested assets × required rate of return

= $4,500,000 × 10%

= $450,000

So, the residual income is

= $500,000 - $450,000

= $50,000