Ann Arbor Division of the Michigan Company has the following statistics for its most recent operations: Assets available for use (Market Value) $3,600,000 Assets available for use (Book Value) $2,000,000 Ann Arbor Division's return on investment 25% Ann Arbor Division's residual income 200,000 Return on investment (entire Michigan Company) 20% Refer to Michigan Company. What is the target rate of
return in Michigan Company?
a. 25%
b. 20%
c. 15%
d. 10%
C
Net Income - (Target Rate of Return ? Total assets) = Residual Income
$500,000 - (Target Rate of Return * $2,000,000) = $200,000
Target Rate of Return * $2,000,000 = $300,000
Target Rate of Return = 15%
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