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Can you help me with couple of questions
1) A Co has a capital employed of $200000.It has a cost of capital of 12% per year .It’s residual income is $36000.What is the company’s ROI ??
Answer is 30%.
A division earns a residual income of $200000.The imputed interest charge is $150000 and it’s cost of capital is 20% per annum .What is the divisions ROCE?
Answer is 46.7%
I don’t get the answer for both can you please show it’s steps .
1. The residual income = profit – (12% x 200,000) = 36,000. Therefore the profit = 60,000
Therefore the ROI = 60,000/200,000 = 30%
2. The residual income = profit – 150,000 = 200,000. Therefore the profit = 350,000.
The capital employed = 150,000/20% = 750,000
Therefore the ROCE = 350,000/750,000 = 46.7%