Standard Media Has a Required Rate of Return of 5

question 11

Multiple Choice

Standard Media has a required rate of return of 5 percent, a cost of capital of 4 percent, and an income tax rate of 30 percent. The following information about its two divisions has been provided by management: $\begin{array}{lrr}&\text { Audio Division }&\text { Video Division }\\\hline\text { NOPAT } & \$ 1,400,000 & \$ 2,000,000 \\\text { Sales } & \$ 10,000,000 & \$ 12,500,000 \\\text { Invested capital } & \$ 15,000,000 & \$ 17,500,000\end{array}$ An opportunity is available that yields an expected income of $45,900 on an investment of $450,000. If the divisions are evaluated based on residual income, which division(s) will accept the opportunity?

• A) Both will accept.
• B) Neither will accept.
• C) Only the Video Division will accept.
• D) Only the Audio division will accept.

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Definitions:

Marketing Researchers

Professionals specialized in gathering, analyzing, and interpreting data about markets, consumers, and trends to inform business decisions.

Willingness to Buy

The extent to which a consumer is ready to purchase a product or service, based on factors like price, quality, and personal preference.

Consumers

Individuals or groups that purchase or have the potential to purchase goods and services for personal use.

Primary Data

Information that is collected firsthand for a specific research purpose or project, such as through surveys, interviews, or experiments.