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Problem 12-4 (Part Level Submission) Consider the following information for Walla Walla Electronics: 12/31/2017 12/31/2018 Total...

Problem 12-4 (Part Level Submission) Consider the following information for Walla Walla Electronics: 12/31/2017 12/31/2018 Total assets $12,514,000 $11,443,800 Noninterest-bearing current liabilities 563,100 552,000 Net income 739,200 927,700 Interest expense 2,285,800 308,040 Tax rate 40% 40% Required rate of return 10% 12% (a) Evaluate the company in terms of residual income (RI), which is equivalent to EVA since there are no adjustments for accounting distortions. (Enter negative answers preceding either - sign, e.g. -45 or in parentheses, e.g. (45).) 2017 2018 Residual income $ $

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Answer #1

Solution:

Computation of Residual income / Economic value added - Walla Walla Electronics
Particulars 2017 2018
Net Income $739,000.00 $927,700.00
Tax rate 40% 40%
Income before taxes $1,231,666.67 $1,546,166.67
Add: Interest expense $2,285,800.00 $308,040.00
Operating income $3,517,466.67 $1,854,206.67
Net operating profit after tax (Operating income * 60%) $2,110,480.00 $1,112,524.00
Total Assets $12,514,000.00 $11,443,800.00
Non interest bearing current liabilities $563,100.00 $552,000.00
Invested capital (Total assets - current liabilities) $11,950,900.00 $10,891,800.00
Required rate of return 10% 12%
Required return on invested capital $1,195,090.00 $1,307,016.00
Residual income (NOPAT - Required return on invested capital) $915,390.00 -$194,492.00
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