The company paid dividends of $183,000 last year. The \"Investment in Balsam Com
ID: 2512596 • Letter: T
Question
The company paid dividends of $183,000 last year. The "Investment in Balsam Company" on the statement of financial position represents an investment in the stock of another company.
Compute the company's margin, turnover, and return on investment for last year. (Round your intermediate calculations and final answers to 2 decimal places.)
The Board of Directors has set a minimum required return of 20%. What was the company's residual income last year? (Round your intermediate calculations and final answers to 2 decimal places.)
Financial data for last year appear below:
Explanation / Answer
Answer a.
Beginning of the year:
Operating Assets = Cash + Accounts Receivable + Inventory + Plant and Equipment
Operating Assets = $263,000 + $126,000 + $255,000 + $466,000
Operating Assets = $1,110,000
End of the year:
Operating Assets = Cash + Accounts Receivable + Inventory + Plant and Equipment
Operating Assets = $31,164 + $215,000 + $266,000 + $473,000
Operating Assets = $985,164
Average Operating Assets = ($1,110,000 + $985,164) / 2
Average Operating Assets = $1,047,582
Margin = Net Operating Income / Sales
Margin = $244,800 / $2,040,000
Margin = 12%
Turnover = Sales / Average Operating Assets
Turnover = $2,040,000 / $1,047,582
Turnover = 1.95
ROI = Margin * Turnover
ROI = 12% * 1.95
ROI = 23.40%
Answer b.
Residual Income = Net Operating Income - Required Return * Average Operating Assets
Residual Income = $244,800 - 20% * $985,164
Residual Income = $47,767.20