Pegasus Recycling Has a Subsidiary That Recycles Yard Waste and Another

question 32

Multiple Choice

Pegasus Recycling has a subsidiary that recycles yard waste and another that recycles paper.Information related to the two subsidiaries follows. $\begin{array}{lrr}&\text { Yard Recycling}&\text { Paper Recycling }\\\text { Total assets } & \$ 8,000,000 & \$ 15,000,000 \\\text { Noninterest-bearing current liabilities } & 500,000 & 1,000,000 \\\text { Net income } & 1,500,000 & 2,600,000 \\\text { Interest expense } & 600,000 & 800,000 \\\text { Required rate of return } & 8 \% & 11 \% \\\text { Cost of capital } & 7 \% & 9 \% \\\text { Tax rate } & 30 \% & 32 \%\end{array}$ Which subsidiary has added the most to shareholder value in the last year?

• 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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