Homework SourseOmaha Grain Company has two divisions which reported the fol
Omaha Grain Company has two divisions, which reported the following results for the most recent year.
Compute each division’s residual income for the year under each of the following assumptions about the firm’s cost of acquiring capital.
Division I Division II
Residual Income at 12%
Residual Income at 15%
Residual Income at 18%
2. Calculate the imputed interest rate, at which the two divisions\' residual income is the same.
Imputed interest rate ______________%
| Omaha Grain Company has two divisions, which reported the following results for the most recent year. |
Solution
(1)
Residual income (RI) = Income - (Average invested capital x Cost of capital (COC))
So:
NOTE: First question is answered.
| Division I | |
| $ | |
| Income (A) | 27,00,000 |
| Invested Capital (B) | 180,00,000 |
| Residual Income @12% [(A) - (B) x 12%] | 5,40,000 |
| Residual Income @15% [(A) - (B) x 15%] | 0 |
| Residual Income @18% [(A) - (B) x 18%] | -5,40,000 |
| Division II | |
| $ | |
| Income (A) | 6,00,000 |
| Invested Capital (B) | 30,00,000 |
| Residual Income @12% [(A) - (B) x 12%] | 2,40,000 |
| Residual Income @15% [(A) - (B) x 15%] | 1,50,000 |
| Residual Income @18% [(A) - (B) x 18%] | 60,000 |
