Question
Honolulu Enterprises has two decentralized divisions (Coconut and Guava) that have decision making responsibility over the amount of resources invested in their divisions. Recent financial
Honolulu Enterprises has two decentralized divisions (Coconut and Guava) that have decision making responsibility over the amount of resources invested in their divisions. Recent financial extracts for both divisions are presented below:
Coconut | Guava | |||||
Fixed assets, gross | $ | 4,500 | $ | 7,200 | ||
Accumulated depreciation | $ | 2,700 | $ | 2,160 | ||
Other assets | $ | 900 | $ | 1,350 | ||
Liabilities | $ | 900 | $ | 1,800 | ||
Sales | $ | 12,150 | $ | 12,960 | ||
Net income after tax* | $ | 1,330 | $ | 1,810 | ||
Average age of fixed assets (years) | 15 | 5 |
*Net income is after tax but before interest Honolulu's weighted average cost of capital (WACC) is 15% and the company uses residual income as a method to evaluate performance. Which of the following statements is correct?
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Coconuts ROI will be raised by divesting of a project with a 20% ROI but its RI will be lower.
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Coconuts RI will decrease by taking on a project with a $12 cost and net income before interest of $3.
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Guavas RI will increase by taking on a project with an $8 cost and net income before interest of $1.1.
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Coconuts RI is less than Guavas RI.
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None of the choices are correct
Honolulu Enterprises has two decentralized divisions (Coconut and Guava) that have decision making responsibility over the amount of resources invested in their divisions. Recent financial extracts for both divisions are presented below: Fixed assets, gross Accumulated depreciation Other assets Liabilities Sales Net income after tax* Average age of fixed assets (years) Coconut $ 4, 500 $ 2, 700 $ 900 $ 900 $12, 150 $ 1,330 15 Guava $ 7, 200 $ 2, 160 $ 1, 350 $ 1,800 $12, 960 $ 1,810 5 *Net income is after tax but before interest Honolulu's weighted average cost of capital (WACC) is 15% and the company uses residual income as a method to evaluate performance. Which of the following statements is correct
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