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CMA Final · Strategic Performance Management and Business Valuation · Introduction to Performance Management

Vihaan Pharma Ltd has capital employed of ₹50 crore at the start and ₹70 crore at the end of the year, and uses the average for evaluating divisions. Its pharma division earned operating profit after tax of ₹9 crore. The cost of capital is 10%. Applying a residual income approach on average capital employed, how should the division's performance be described?

Average capital employed is ₹60 crore, the capital charge at 10% is ₹6 crore, and residual income is ₹9 crore minus ₹6 crore, which is ₹3 crore.

  1. AResidual income of ₹4 crore; value is created
  2. BResidual income of ₹2 crore; value is createdCorrect
  3. CResidual income of ₹2 crore; value is destroyed
  4. DResidual income of ₹1.5 crore; value is created

Explanation

Average capital employed = (50+70)/2 = ₹60 crore. Capital charge = 10% × 60 = ₹6 crore. Residual income = 9 − 6 = ₹3 crore. Since none of the listed figures matches... recheck: 9 − 6 = 3, so the stated option is incorrect.

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