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drek231 [11]
3 years ago
9

The Campus Division of All-States Bank has assets of $1,800 million. During the past year, the division had profits of $225 mill

ion. All-States Bank has a cost of capital of 4 percent. Ignore taxes.
Required:
(a) Compute the divisional ROI for the Campus Division. (Enter your answer as a percentage rounded to 1 decimal place (i.e., 32.1)
(b) Compute the divisional RI for the Campus Division. (Enter your answer in dollars, not in millions.)
Business
1 answer:
Nookie1986 [14]3 years ago
6 0

Answer: (a) 12.5%;

(b) $153 million

Explanation:

Given that,

Campus Division of All-States Bank,

Assets = $1,800 million

Division profits = $225 million

Cost of capital = 4 percent

(a) Divisional ROI = \frac{Profit}{Assets}

                             = \frac{225}{1,800}\times100

                             = 12.5%

(b) Divisional RI = Profits - Assets × cost of capital

                          =  $225 million - $1,800 million × 0.04(4%)

                          = $225 million - $72 million

                          = $153 million

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Answer:

The required return for the new project is 6.87%

Explanation:

In order to calculate the required return for the new project we would have to calculate the Weighted Average Cost of Capital (WACC) adjusted by risk adjustment factor .

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After -tax Cost of Debt = 3.40%

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The main purpose of price/sales multiple ratio is typically only for the purpose of valuation of firms having no earnings till the date of valuation. Therefore, the given statement holds true.

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