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What is the residual income for each division

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Return on Investment (ROI) and Residual Income (RI) Consider the following data (in millions) from Midwest Financial, Inc., which has two main divisions: mortgage loans, and consumer loans:

Mortgage Loans

Consumer Loans

Average total assets

$2,000

$20,000

Operating income

$400

$2,500

ROI

20%

12.5%

Required

1. Based on ROI, which division is more successful? Why?

2. Midwest uses RI as a measure of the financial performance of its divisions. What is the residual income (RI) for each division if the minimum desired rate of return is: (a) 10 percent, (b) 15 percent, and (c) 20 percent? Which division is more successful under each of these rates?

Reference no: EM13875329

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