Pegasus Recycling Has a Subsidiary That Recycles Yard Waste and Another

question 102

Multiple Choice

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

---

Definitions:

Causal Schemata

Experience-based beliefs about how certain types of causes interact to produce an effect.

Internal Cause

An explanation for behavior or events that attributes their origin to factors within the person, such as traits, feelings, or abilities.

Emotional Lability

The tendency to experience rapid and intense emotional changes or mood swings, with emotions that might not be proportionate to the situation.

Self-Categorisation Theory

A theory in social psychology that explains how individuals classify themselves and others into specific groups, influencing behavior and group dynamics.