Pegasus Recycling Has a Subsidiary That Recycles Yard Waste and Another

question 93

Multiple Choice

Pegasus Recycling has a subsidiary that recycles yard waste and another that recycles paper. Information related to the two subsidiaries follows. $\begin{array}{lrr}&\text { Yard Recycling }&\text { Paper Recycling }\\\hline\text { Total assets } & \$ 8,000,000 & \$ 15,000,000 \\\text { Noninterest-bearing current liabilities } & 500,000 & 1,000,000 \\\text { Net income } & 1,500,000 & 2,600,000 \\\text { Interest expense } & 600,000 & 800,000 \\\text { Required rate of return } & 8 \% & 11 \% \\\text { Cost of capitall } & 7 \% & 9 \% \\\text { Tax rate } & 30 \% & 32 \%\end{array}$ Based on the limited information, which subsidiary is the best candidate for expansion?

• A) Yard recycling, because it has a higher return on investment
• B) Paper recycling, because it has a higher residual income
• C) Both contributed equally in different ways
• D) More information is needed to determine the answer

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Definitions:

Communication Process

The method by which information is exchanged between a sender and a receiver through a medium or channel.

Misrepresentation

The act of deliberately presenting false or misleading information.

Filtering

The process of selecting which information will be paid attention to and which will be ignored.

Information Overload

A state of being overwhelmed by the amount of information one receives, making it difficult to make decisions or concentrate on tasks.