Bellingham Division Has a Required Rate of Return by Corporate

question 22

Multiple Choice

Bellingham Division has a required rate of return by corporate headquarters of 20%. The weighted average cost of capital is 12%. You are given the following information for Bellingham's operations for a two-year period: 2005 2004
Current assets $ 50,000 $ 60,000
Long-term assets 200,000 204,000
Accumulated amortization 60,000 44,000
Current liabilities 40,000 20,000
Long-term debt 100,000 140,000
Operating income for the year 19,000 21,000
Tax rate 40% 40%
The average investment to be used in the EVA computation for 2005 was:

• A)$257,000
• B)$227,000
• C)$279,000
• D)$175,000

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Definitions:

Repurchase Stock

The act of a company buying back its own shares from the marketplace, which can affect shareholder value and earnings per share.

Residual Dividend Policy

A strategy where dividends paid to shareholders are based on earnings left after all operational and expansion expenses and investments are covered.

NPV Projects

Projects that are evaluated based on their Net Present Value, which calculates the difference between the present value of cash inflows and outflows over a period of time.

Dividend Income

is money paid to shareholders out of a corporation's earnings in proportion to the number of shares held, usually on a regular basis.