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A multinational corporation has a number of divisions, two of which are the Pacific Rim Division and the European Division. Data of the two divisions
A multinational corporation has a number of divisions, two of which are the Pacific Rim Division and the European Division. Data of the two divisions are as follows:
| Pacific Rim | European |
Average operating assets | 900,000 | 9,000,000 |
Operating income | 126,000 | 1,350,000 |
Minimum required return | 12% | 12% |
- Compute residual income for each division. By comparing residual income, is it possible to make a useful comparison of divisional performance? Explain.
- Compute the residual rate of return by dividing the residual income by the average operating assets. Is it possible now to say that one division outperformed the other? Explain.
- Compute the return on investment for each division. Can we make a meaningful comparison of divisional performance? Explain.
- Add the residual rate of return computed in Requirement 2 to the required rate of return. Compare these rates with the ROI computed in Requirement 3. Will this relationship always be the same?
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