Franklin Home Maintenance Company earned operating income of $6,387,400 on operating assets of $58,600,000 during Year...
Franklin Home Maintenance Company earned operating income of $6,387,400 on operating assets of $58,600,000 during Year 2. The Tree Cutting Division earned $1,155,840 on operating assets of $6,880,000. Franklin has offered the Tree Cutting Division $2,120,000 of additional operating assets. The manager of the Tree Cutting Division believes he could use the additional assets to generate operating income amounting to $424,000. Franklin has a desired return on investment (ROI) of 8.90 percent.
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Calculate the residual income for Franklin, the Tree Cutting Division, and the additional investment opportunity.
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Homework Answers
Residual income = Operating income - Required return
| Residual income | ||
|---|---|---|
| Franklin | (58,600,000*8.90%) - 6,387,400 | 1,172,000 |
| Tree cutting | (6,880,000*8.90%) - 1,155,850 | 543,520 |
| Additional investment | (2,120,000*8.90%) - 424,000 | 235,320 |
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Franklin Home Maintenance Company earned operating income of
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