Petra Company Has the Following Information Available for One of Its

question 55

Multiple Choice

Petra Company has the following information available for one of its divisions:
$\begin{array}{lr}\text { Average operating assets } & \$ 2,500,000 \\\text { Sales } & \$ 4,000,000 \\\text { Return on investment (ROI) } & 40 \%\end{array}$
If Petra's cost of capital is 25%,what is the division's residual income?

• A)$1,500,000
• B)$1,000,000
• C)$375,000
• D)$975,000
• E)None of the answer choices is correct.

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Definitions:

Return On Investment

A measure used to evaluate the efficiency or profitability of an investment, comparing the gain from an investment relative to its cost.

Income From Operations

The earnings generated from a company's regular business activities, excluding revenues and expenses from non-operational sources.

Residual Income

The amount of income that exceeds the minimum rate of return expected by a company or investor.

Performance Measure

Metrics or benchmarks used to gauge an individual's, department's, or organization's performance against expected results or goals.