ROI and Residual Income

A multinational corporation has a number of divisions, two of which are the North American Division and the Pacific Rim Division. Data on the two divisions are as follows:

	North American		Pacific Rim
Average operating assets	$15,000,000		$6,700,000
Operating income	1,250,000		610,000
Minimum required return	7	%	7	%

Round all rates of return to four significant digits.

Required:

1. Compute residual income for each division.

North American	$ fill in the blank 1
Pacific Rim	$ fill in the blank 2

By comparing residual income, is it possible to make a useful comparison of divisional performance?

YesNo

2. Compute the residual rate of return by dividing the residual income by the average operating assets. Enter your answers as percentages, rounded to two decimal places. For example, the decimal value .03827 would be entered as "3.83" percent.

North American	fill in the blank 4 %
Pacific Rim	fill in the blank 5 %

Is it possible now to say that one division outperformed the other?

YesNo

3. Compute the return on investment for each division. Enter your answers as percentages, rounded to two decimal places. For example, the decimal value .03827 would be entered as "3.83" percent.

North American	fill in the blank 7 %
Pacific Rim	fill in the blank 8 %

Can we make meaningful comparisons of divisional performance?

YesNo

4. Add the residual rate of return computed in Requirement 2 to the required rate of return. Enter your answers as percentages, rounded to two decimal places. For example, the decimal value .03827 would be entered as "3.83" percent.

North American	fill in the blank 10 %
Pacific Rim	fill in the blank 11 %

Compare these rates with the ROI computed in Requirement 3. Will this relationship always be the same?

YesNo