Posted: July 12th, 2016

Calculate net operating income and residual income for each division?

How does lands end use its free cash flow? Do you think its use of freee cash flows reflects good financial strategy?

Williamson Group operates a chain of bookstores. A recent business expansion plan resulted in the opening of more than 25 new stores. The Upland store has one more feature that the Stowe store does not have-a small coffe shop. Early indications are that the coffee shop has driven up the location’s revenues and profits. Operating data for two of these stores is provided below:
Upland Stowe
ROI 18.75% 14.0%
Net operating income ? ?
Minimum required return 15% 15%
Average operating assets $200,000 $150,000
Residual income ? ?

A) Calculate net operating income and residual income for each division.
B) Compare the two divisions and discuss the usefulness of ROI and residual income for the purpose of comparing the divisions.

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