Question

If a business unit's existing ROI exceeds the unit's minimum desired rate of return (divisional cost of capital), the ______.

Option 1:
Business unit is considered financially healthy.

Option 2:
Business unit is not meeting expectations.

Option 3:
Business unit is generating negative residual income.

Option 4:
Divisional cost of capital is adjusted upward.

Answer 1

Option 1 is correct because when a business unit's ROI surpasses the cost of capital, it signifies that the unit is financially healthy and effectively utilizing its investments to generate returns above the expected threshold.

Step-by-step explanation:

If a business unit's existing ROI exceeds the unit's minimum desired rate of return (divisional cost of capital), the correct answer is Option 1: Business unit is considered financially healthy.

This is because ROI (Return on Investment) is a measure of the profitability and efficiency of a business in generating returns from its investments.

When ROI exceeds the minimum desired rate of return, it means the investments are producing returns at a rate that is acceptable or better than what the business expects, which often indicates financial health.

The division's cost of capital serves as a benchmark, and surpassing this benchmark can be a sign of effective use of capital and strong financial performance.

Option 1 is correct because when a business unit's ROI surpasses the cost of capital, it signifies that the unit is financially healthy and effectively utilizing its investments to generate returns above the expected threshold.