Problem: Top management of the Gates Corporation is trying to construct a performance evaluation system to use to evaluate each of its three divisions. This past years financial data are as follows:
Division A Division B Division C
Total assets $530,000 $10,700,000 $6,375,000
Noninterest-bearing current liabilities 30,000 1,250,000 600,000
Net income 102,000 1,040,000 780,000
Interest expense 30,000 1,100,000 700,000
Tax rate 40% 40% 40%
Required rate of return 10% 12% 14%
Required
Q1. How would the divisions be ranked (from best to worst performance) if the evaluation were based on net income?
Q2. How would the divisions be ranked (from best to worst performance) if the evaluation were based on ROI?
Q3. How would the divisions be ranked (from best to worst performance) if the evaluation were based on residual income?