Question

Exercise 11-9 Return on Investment (ROI) and Residual Income Relations [LO11-1, LO11-2]

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. Round your percentage answers to nearest whole percent and other amounts to whole dollars.)

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Answer 1

solution:

Company A
Net Operating Income = $159000 x 22% = $34980
Minimum Required Return = $159000 x 14% = $22260
Residual Income = $34980 - $22260 = $12720

Company B
Average Operating Assets = $52000 / 17% = $305882.3
Minimum Required Return = $53000 / $305882.3 x 100 = 17.32%
Residual Income = $52000 - $53000 = ($1000)

Company C
Minimum Required Return = $157000 x 13% = $20410
Net Operating Income = $20410 + $5000 = $25410
Return on Investment = $25410 / $157000 x 100 = 16.18%