Bellingham Division has a required rate of return by corporate headquarters of 20%. The weighted average cost of capital is 12%. You are given the following information for Bellingham's operations for a two-year period: 2015 2014 Current assets $ 50,000 $ 60,000 Long-term assets 200,000 204,000 Accumulated amortization 60,000 44,000 Current liabilities 40,000 20,000 Long-term debt 100,000 140,000 Operating income for the year 19,000 21,000 Tax rate 40% 40% The ROI for 2015 was: A. 9.3% B. 3.7% C. 10.0% D. 20.0%

Question

Lena Tanner

Business

23 March, 10:37

Bellingham Division has a required rate of return by corporate headquarters of 20%. The weighted average cost of capital is 12%. You are given the following information for Bellingham's operations for a two-year period: 2015 2014 Current assets $ 50,000 $ 60,000 Long-term assets 200,000 204,000 Accumulated amortization 60,000 44,000 Current liabilities 40,000 20,000 Long-term debt 100,000 140,000 Operating income for the year 19,000 21,000 Tax rate 40% 40% The ROI for 2015 was: A. 9.3% B. 3.7% C. 10.0% D. 20.0%

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Answers (1)

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Andre Zavala · Answer 1

The return on investment in 2015 is 9.3%

Explanation:

The formula for return on investment is given as:

ROI=operating income/average investment

Average investment is the same as average equity, which can be computed thus:

Current assets $50000 $60000

Long term assets $200000 $204000

less:

Accumulated amortization ($60000) ($44000)

Equity $190000 $220000

Average investment = ($190000+$220000) / 2=$205000

ROI=$19000/$205000=9.3%

This is lower than average cost of capital of 12% and the corporate headquarters rate of return of 20%