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:
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Mortgage Loans
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Consumer Loans
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Average total assets
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$2,000
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$20,000
|
|
Operating income
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$400
|
$2,500
|
|
ROI
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20%
|
12.5%
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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?