How Much Did the Parent Really Earn on Its Investment? Presto Inc. created Seco Inc. on 1/1/06 by investing $1,000,000 cash. Information regarding Seco follows:

Net Income Dividends Declared 2007 . 300,000 400,000 2008 . 330,000 130,000 Seco’s earnings occurred evenly throughout each year except for 2007 when $250,000 of income was earned in the first six months. Seco’s dividends were declared and paid at the end of each year.

1 What is the parent’s annual return on investment (AROI) for each year under the equity methods Use the beginning investment balances for this requirement — not the average balances.

2 Repeat requirement 1 but use the cost method.

3 Which method depicts the parent’s true annual return on investment for 2007? Why?

4 Calculate the AROI internal rate of return (IRR). What assumption must you make to do so?

5 Repeat the AROI calculation for 2007 under the equity method but assume that $200,000 of the dividends was declared and paid on 1/1/07 and $200,000 was declared and paid on 12/31/07.

6 Repeat the calculation for 2007 under the equity method but assume that the entire $400,000 of dividends was declared and paid on 6/30/07.

7 Repeat the calculation for 2006 under the equity method using the average investment balance.

Is the correct annual return on investment this percentage or the percentage in requirement I ? Why?