The following information relates to the operating performance of three divisions of Paul,Inc.for last year.
Required:
a.Compute the rate of return on investment (ROI)of each division for last year.
b.Assume that the firm levies a charge on each division for the use of funds.The charge is 10 percent on investment,and the accounting system deducts it in measuring divisional net income.Recalculate ROI using divisional net income after deduction of the use-of-funds charge in the numerator.
c.Which of these two measures do you think gives the better indication of operating performance? Explain your reasoning.
Definitions:
Constant Rate
A fixed rate of change, meaning something increases or decreases at a steady and unvarying speed or value over time.
Rational Expectations
The economic theory that individuals make decisions based on their rational outlook, available information, and past experiences.
Stabilization Policy
Economic strategies and actions taken by a government or central bank to stabilize an economy, aiming to reduce fluctuations in the business cycle.
Market Participants
Individuals or entities engaging in buying, selling, or other transactions in markets.
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