A key use of sensitively analysis is to cash flow Question Hel Candy\'s Chocolat
ID: 2598059 • Letter: A
Question
A key use of sensitively analysis is to cash flow Question Hel Candy's Chocolate Company's tinancial management is compiling data in order to assess the tavorability of the company's Investments The Boise division of the company calculate tota nvestment tS2 000 and the operating income is computed to be S380 000 while the required rate of return is 15%, The une dision of the company has taledaw nvestren t$15 000 and an operan i neof$230,00 whie the Butte hision also has a 15% required rate of retun Required Compute the residual income at the Boise division and the cost of capital for the Butte division. A $300,000 and $225,000 OB. $120,.000 and $230,000 OC. $80,000 and $5,000 OD. $80,000 and $225,000 OE$225,000 and $5,000 Click to select your answer O Type here to search e a 12/Explanation / Answer
Candy’s Chocolate Company
Computation of the residual income at the Boise division and the cost of capital for the Butte division:
Residual income = operating income – return on assets
Operating income = $380,000
Return on assets = 15%
Assets = $2,000,000
Return on assets = 2,000,000 15% = $300,000
Residual income = $380,000 - $300,000 = $80,000
Residual income of Boise division = $80,000
Cost of capital = required rate of return x operating assets
Operating assets = $1,500,000
Cost of capital = 15% of $1,500,000 = $225,000
Hence, the cost of capital for Butte division = $225,000
Hence, the residual income of Boise division and cost of capital at Butte division are $80000 and $225,000, respectively.
The answer option D. is correct.
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