Question

A family friend has asked your help in analyzing the operations of three anonymous companies operating in the same service sector industry. Supply the missing data in the table below: (Loss amounts should be indicated by a minus sign. Enter your ROI and Rate of Return Percentage answers to the nearest percentage (i.e., 0.12 should be entered as 12).) Company A $ 450,000 $ 770,000 Sales 690,000 $ Net operating income 49,000 $ Average operating assets 306,250 158,000 152,000 16 % 22% Return on investment (ROI) % Minimum required rate of return: 17 % 10 % Percentage Dollar amount 49,000 Residual income 5,000 EA

Answer 1

Answer:

Answer: Company 450,000 33,440 152,000 22% 770,000 49,000 306,250 16% 690,000 20,800 158,000 13% Sales Net Operating Income Average Operating Assets Return on Investment (ROI) Minimum required rate of return: Percentage Dollar Amount Residual Income 17% 25,840 7,600 16% 49,000 10% 15,800 5,000

Company A:
Return on Investment (ROI) = Net Operating Income / Average Operating Assets * 100
22 = Net Operating Income / $152,000 * 100
Net Operating Income = $33,440

Minimum Required Return (Dollar) = Average Operating Assets * Minimum Required rate of return %
Minimum Required Return (Dollar) = $152,000 * 17%
Minimum Required Return (Dollar) = $25,840

Residual Income = Net Operating Income - Minimum Required Return (Dollar)
Residual Income = $33,440 - $25,840
Residual Income = $7,600

Company B:
Return on Investment (ROI) = Net Operating Income / Average Operating Assets * 100
16 = $49,000 / Average Operating Assets * 100
Average Operating Assets = $306,250

Minimum Required Return (Dollar) = Average Operating Assets * Minimum Required rate of return %
$49,000 = $306,250 * Minimum Required rate of return %
Minimum Required rate of return % = 16%

Residual Income = Net Operating Income - Minimum Required Return (Dollar)
Residual Income = $49,000 - $49,000
Residual Income = $0

Company C:
Minimum Required Return (Dollar) = Average Operating Assets * Minimum Required rate of return %
Minimum Required Return (Dollar) = $158,000 * 10%
Minimum Required Return (Dollar) = $15,800

Residual Income = Net Operating Income - Minimum Required Return (Dollar)
$5,000 = Net Operating Income – $15,800
Net Operating Income = $20,800

Return on Investment (ROI) = Net Operating Income / Average Operating Assets * 100
Return on Investment (ROI) = $20,800 / $158,000 * 100
Return on Investment (ROI) = 13%