Omaha Grain Company has two divisions, which reported the following results for

Question

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.

Explanation / Answer

(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

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