Madison Corp. has a hurdle rate of 9%. Calculate the missing values: OperatingincomeAverageInvested assetsReturn oninvestmentResidualincome$115,000$800,000a.b.c.$1,350,00017%d.$175,000e.f.$31,000g.$750,000h.$36,000$46,800i.13%j.
What will be an ideal response?
a. 14.375% = $115,000/$800,000
b. $43,000 = $115,000 - (9% × $800,000)
c. $229,500 = $1,350,000 × 17%
d. $108,000 = $229,500 - (9% × $1,350,000) or (17% - 9%) × $1,350,000
e. $1,600,000 = ($175,000 - $31,000)/9%
f. 10.9375% = $175,000/$1,600,000
g. $103,500 = $36,000 + 9% × $750,000
h. 13.8% = $103,500/$750,000
i. $360,000 = $46,800/13%
j. $14,400 = $46,800 - (9% × $360,000)
ROI = Operating income/Average invested assets. Residual income = Operating income - Hurdle rate × Average invested assets.
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