Coolbrook Company has the following information available for the past year: Str
ID: 2576300 • Letter: C
Question
Coolbrook Company has the following information available for the past year: Stream Sales revenue Cost of goods sold and operating expenses Net operating income Average invested assets River DivisionDivision $ 1,203,000 S 1,801,000 888,0001292.000 S 315,000 S509,000 S 1,070,000S 1,510,000 The company's hurdle rate is 6.76 percent Required: 1. Calculate return on investment (ROl) 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% Stream Division River Division 29,44 33,71% ROI $406,924 Residual Income (Loss)$242,668|Explanation / Answer
1 Return on Investmet=net operating income/Average invested assets River Division Stream Division 1) Net operating income 315000 509000 2) Average invested assets 1070000 1510000 3) Return on investment (1)/(2) 29.44% 33.71% Residual income=Net operating income-(Average invested assets*hurdle rate) River division=315000-(1070000*6.76%)=242668 Stream division=509000-(1510000*6.76%)=406924 a. Operating income increases by 8%. Return on Investmet=net operating income/Average invested assets River Division Stream Division 1) Net operating income 340200 549720 (315000*108%) (509000*108%) 2) Average invested assets 1070000 1510000 3) Return on investment (1)/(2) 31.79% 36.41% Residual income=Net operating income-(Average invested assets*hurdle rate) River division=340200-(1070000*6.76%)=267868 Stream division=549720-(1510000*6.76%)=447644 b. Operating income decreases by 10%. Return on Investmet=net operating income/Average invested assets River Division Stream Division 1) Net operating income 283500 458100 (315000*90%) (509000*90%) 2) Average invested assets 1070000 1510000 3) Return on investment (1)/(2) 26.50% 30.34% Residual income=Net operating income-(Average invested assets*hurdle rate) River division=283500-(1070000*6.76%)=211168 Stream division=458100-(1510000*6.76%)=356024 c. River Division Stream Division 1) Net operating income 424000 618000 (315000+109000) (509000+109000) 2) Average invested assets 1322000 1762000 (1070000+252000) (1510000+252000) 3) Return on investment (1)/(2) 32.07% 35.07% Residual income=Net operating income-(Average invested assets*hurdle rate) River division=424000-(1070000*6.76%)=334633 Stream division=458100-(1510000*6.76%)=338989 d. If hurdle rate=4.76% Return on Investmet=net operating income/Average invested assets River Division Stream Division 1) Net operating income 315000 509000 2) Average invested assets 1070000 1510000 3) Return on investment (1)/(2) 29.44% 33.71% Residual income=Net operating income-(Average invested assets*hurdle rate) River division=315000-(1070000*4%)=272200 Stream division=509000-(1510000*4%)=448600