Question

Financial data for Beaker Company for last year appear below: Ragano Inc. Statements of Financial Position Beginning Balance Ending Balance Assets: Cash Accounts receivable Inventory Plant and equipment (net) Investment in Cedar Company Land (underdeveloped) Total assets $50,000 20,000 30,000 120,000 80,000 170,000 $470,000 $70,000 25,000 35,000 110,000 100,000 170,000 $510,000 Liabilities and owners' equity: Accounts payable Long-term deby Owners' equity Total liabilities and owners' equity $70,000 250,000 150,000 $470.000 $90,000 250,000 170,000 $510,000 Beaker Company Income Statement Sa;es Less operating expenses Net operating income Less interest and taxes: Interest expense Tax expense Operating Income $414,000 351,900 62,100 S30,000 10,000 40,000 $22,100 Pago Break The company paid dividends of S2,100 last year. The "Investment in Cedar Company" on the statement of financial position represents an investment in the stock of another company. Required: a) Compute the company's margin, turnover, and return on investment for last year. b) The Board of Directors of Ragapo Inc's have set a minimum required return of 20%. What was the company's residual income last year?

Answer 1

1	Average operating assets				230000
2	Margin				15.0%
	Turnover				1.80
	ROI				27.0%
3	Residual income				16100

Working

1)	Margin = net operating income/sales
	Turnover = sales/average operating assets
	ROI          = margin * turnover
	Margin		15.0%
	turnover		1.80
	ROI		27.0%
	total operating assets don't include investments in other companies or in undeveloped
	land
					ending	Beginning
					balances	balances
	Cash				70,000	50,000
	account receivable				25,000	20,000
	inventory				35,000	30,000
	plant and equipment,net				110,000	120,000
	total Assets				240,000	220,000
	Average operating assets = ( ending balances + beginning balances )/2
				(240,000+220,000)/2
				230000
2)	Net operating income				62,100
	minimum required return				20%
	residual income				16100
	Residual income =net operating income - (average operating assets *min required return)