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Management Studies

Q. Show the Merits of residual income?

Merits of residual income (RI)

- Consistent or goal congruence with profit maximisation e.g. an enforced measure of profitability.

- Different interest charges (cost of capital) can be applied to divisions e.g. high inherent risk within different industries can have higher cost of capitals applied.

- Forces managers to consider cost of financing new investment and to be efficient when managing working capital for example minimisation of inventory and excessive cash balances.

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Strategic Management, Management Studies

Category:- Strategic Management
Reference No.:- M9576467

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