A Division Within a Firm Has an Average Return on Assets

question 1

Multiple Choice

A division within a firm has an average return on assets employed of 12% and is considering purchasing a new asset.The new asset is expected to generate cash flows of $17,000 per year for the next seven years but these have a beta coefficient of 1.3 compared to the portfolio return on the other assets in the division.The risk free rate of return is 2%; the weighted average cost of capital is 9%; and, the cost of the new asset is $170,000.
-What is the residual income?

• A)$(3,400)
• B)$5,100
• C)$0
• D)$6,800
• E)$15,300

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