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Envision Company has a target return on capital of 12 percent. The following financial information is available for October ($ thousands):

Software Division (Value Base) Consulting Division (Value Base) Venture Capital Division (Value Base)
Book Current Book Current Book Current
Sales $150,000 $150,000 $250,000 $250,000 $850,000 $850,000
Income 17,750 17,200 21,900 25,520 62,230 57,420
Assets 70,000 90,000 100,000 110,000 610,000 590,000
Liabilities 10,000 10,000 14,000 14,000 40,000 40,000

Required:
a. Compute the return on investment using both book and current values for each division.
b. Compute the residual income for both book and current values for each division.

Respuesta :

anthougo

Answer:

Envision Company

               Software Division   Consulting Division  Venture Capital Division

                   (Value Base)              (Value Base)                  (Value Base)  

                Book       Current    Book        Current       Book             Current

a) Return on investment

=             25.3%       19%           21.9%         23.2%       10.2%             9.7%

b) Residual income = operating income - (minimum required return x operating assets)

=              9,350      6,400       9,900        12,320      (10,970)      (13,380)

Explanation:

a) Data and Calculations:

Target return on capital = 12%

               Software Division   Consulting Division  Venture Capital Division

                   (Value Base)              (Value Base)                  (Value Base)  

                Book       Current    Book        Current       Book             Current

Sales    $150,000 $150,000 $250,000  $250,000  $850,000   $850,000

Income      17,750      17,200      21,900       25,520       62,230        57,420

Assets     70,000     90,000    100,000       110,000     610,000     590,000

Liabilities 10,000      10,000       14,000        14,000       40,000       40,000

               Software Division   Consulting Division  Venture Capital Division

                   (Value Base)              (Value Base)                  (Value Base)  

                Book       Current    Book        Current       Book             Current

a) Return on investment = Income/Assets * 100

=             25.3%       19%           21.9%         23.2%       10.2%             9.7%

b) Residual income = operating income - (minimum required return x operating assets)

Minimum required returns (in dollar value) = 12% of Assets:

=               8,400       10,800      12,000       13,200     73,200      70,800

Residual income

=              9,350         6,400       9,900       12,320    (10,970)      (13,380)

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