Mesopotamian Materials Inc *Net Income Is After Tax but Before Interest
MMI's Weighted

question 6

Multiple Choice

Mesopotamian Materials Inc.(MMI) has two decentralized divisions (Ur and Babylon) that have decision making responsibility over the amount of resources invested in their divisions.Recent financial extracts for both divisions are presented below: $\begin{array}{c}\begin{array}{lll}\\\text {Fixed assets, gross}\\\text {Accumulated depreciation}\\\text {Other assets}\\\text {Liabilities}\\\text {Sales}\\\text {Net income after tax*}\\\text {Average age of fixed assets (years) }\end{array}\begin{array}{rr}\text {Ur}\\\$ 2,500 \\\$ 1,500 \\\$ 500 \\\$ 500 \\\$ 6,750 \\\$ 743 \\ 15 \end{array}\begin{array}{l}\text {Babylon:}\\\$ 4,000 \\\$ 1,200 \\\$ 750 \\\$ 1,000 \\\$ 7,200 \\\$ 1,008\\5\end{array}\end{array}$
*Net income is after tax but before interest
MMI's weighted average cost of capital (WACC) is 11.5%.The MMI measures division performance based on the book value of net assets.The producer price index 15 years ago was 100,116 five years ago,and currently is 125.
Using historical costs,which is true?

• A)Babylon is a profit center
• B)At a WACC of 5%,Ur's residual income is lower than Babylon's by $123
• C)At the planned WACC (11.5%),Ur's residual income is higher than Babylon's by $87
• D)At a WACC of 25%,Ur's residual income is higher than Babylon's by $123
• E)None of the choices are correct

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