Coolbrook Company has the following information available for the past year: The
ID: 2535133 • Letter: C
Question
Coolbrook Company has the following information available for the past year:
The company’s hurdle rate is 7.01 percent.
Required:
1. Calculate return on investment (ROI) and residual income for each division for last year. (Enter your ROI answers as a percentage rounded to two decimal places, (i.e., 0.1234 should be entered as 12.34%.))
2. Recalculate ROI and residual income for each division for each independent situation that follows: (Enter your ROI answers as a percentage rounded to two decimal places, (i.e., 0.1234 should be entered as 12.34%.))
a. Operating income increases by 11 percent.
b. Operating income decreases by 12 percent.
c. The company invests $243,000 in each division, an amount that generates $106,000 additional income per division.
d. Coolbrook changes its hurdle rate to 5.01 percent.
Explanation / Answer
Answers
Working
River Division
Stream Division
A
Net Operating Income
$ 3,07,000.00
$ 5,21,000.00
B
Average invested Assets
$ 10,90,000.00
$ 15,20,000.00
C=A/B
ROI
28.17%
34.28%
D
Hurdle rate
7.01%
7.01%
E=B x D
Hurdle Income
$ 76,409.00
$ 1,06,552.00
F=A - E
Residual Income
$ 2,30,591.00
$ 4,14,448.00
Answer ‘a’
Working
River Division
Stream Division
A
Net Operating Income
$ 3,40,770.00
$ 5,78,310.00
B
Average invested Assets
$ 10,90,000.00
$ 15,20,000.00
C=A/B
ROI
31.26%
38.05%
D
Hurdle rate
7.01%
7.01%
E=B x D
Hurdle Income
$ 76,409.00
$ 1,06,552.00
F=A - E
Residual Income
$ 2,64,361.00
$ 4,71,758.00
Answer ‘b’
Working
River Division
Stream Division
A
Net Operating Income
$ 2,70,160.00
$ 4,58,480.00
B
Average invested Assets
$ 10,90,000.00
$ 15,20,000.00
C=A/B
ROI
24.79%
30.16%
D
Hurdle rate
7.01%
7.01%
E=B x D
Hurdle Income
$ 76,409.00
$ 1,06,552.00
F=A - E
Residual Income
$ 1,93,751.00
$ 3,51,928.00
Answer ‘c’
Working
River Division
Stream Division
A
Net Operating Income
$ 4,13,000.00
$ 6,27,000.00
B
Average invested Assets
$ 13,33,000.00
$ 17,63,000.00
C=A/B
ROI
30.98%
35.56%
D
Hurdle rate
7.01%
7.01%
E=B x D
Hurdle Income
$ 93,443.30
$ 1,23,586.30
F=A - E
Residual Income
$ 3,19,556.70
$ 5,03,413.70
Answer ‘d’
Working
River Division
Stream Division
A
Net Operating Income
$ 3,07,000.00
$ 5,21,000.00
B
Average invested Assets
$ 10,90,000.00
$ 15,20,000.00
C=A/B
ROI
28.17%
34.28%
D
Hurdle rate
5.01%
5.01%
E=B x D
Hurdle Income
$ 54,609.00
$ 76,152.00
F=A - E
Residual Income
$ 2,52,391.00
$ 4,44,848.00
Working
River Division
Stream Division
A
Net Operating Income
$ 3,07,000.00
$ 5,21,000.00
B
Average invested Assets
$ 10,90,000.00
$ 15,20,000.00
C=A/B
ROI
28.17%
34.28%
D
Hurdle rate
7.01%
7.01%
E=B x D
Hurdle Income
$ 76,409.00
$ 1,06,552.00
F=A - E
Residual Income
$ 2,30,591.00
$ 4,14,448.00