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A division earns a residual income of $200,000. The imputed interest charge is $150,000 and its cost of capital is 20% per annum.
What is the division’s ROCE?
Ans: 46.7%.can someone please explain to me the formula, and the meaning of imputed interest charge.
Thank you.
I assume that you have watched the free lecture on this?
Imputed interest is another word for notional interest.
The residual income is the profit less the notional interest on the investment.
We know the interest is at 20% and therefore the amount of the investment is 150,000 / 20%.
We know the RI is 200,000, so the profit must be 200,000 + 150,000.
Now the ROCE is easy 🙂
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