Question

Bellingham Division has a required rate of return by corporate headquarters of 20%. The weighted average cost of capital is 12%. You are given the following information for Bellingham's operations for a two-year period: 2015 2014 Current assets $ 50,000 $ 60,000 Long-term assets 200,000 204,000 Accumulated amortization 60,000 44,000 Current liabilities 40,000 20,000 Long-term debt 100,000 140,000 Operating income for the year 19,000 21,000 Tax rate 40% 40% The ROI for 2015 was: A. 9.3% B. 3.7% C. 10.0% D. 20.0%

Answer 1

Answer:

The return on investment in 2015 is 9.3%

Explanation:

The formula for return on investment is given as :

ROI=operating income/average investment

Average investment is the same as average equity,which can be computed thus:

Current assets                       $50000            $60000

Long term assets                   $200000         $204000

less:

Accumulated amortization($60000)            ($44000)

Equity                                    $190000           $220000

Average investment=($190000+$220000)/2=$205000

ROI=$19000/$205000=9.3%

This is lower than average cost of capital of 12% and the corporate headquarters rate of return of 20%