Question

For fiscal year 2018, Hiroole Department Store had net income of $6,060,000. Interest expense was $2,272,500,...

For fiscal year 2018, Hiroole Department Store had net income of $6,060,000. Interest expense was $2,272,500, and the company’s tax rate on income was 40 percent. Total assets were $80,827,000, and noninterest-bearing current liabilities were $7,188,000. The company’s cost of capital (required rate of return) is 10 percent. Calculate NOPAT, invested capital, and residual income for Hiroole Department Store. (Enter negative answers preceding either - sign, e.g. -45 or in parentheses, e.g. (45).) NOPAT $ Invested capital $ Residual income $ Comment on the company’s profitability. The company appears .

Homework Answers

Answer #1

Net income before tax = $6,060,000 / 60% = $10,100,000

Net income before interest = $10,100,000 + $2,272,500 = $12,372,500

NOPAT = $12,372,500 * 60% = $7,423,500

Invested capital = $80,827,000 - $7,188,000

Invested capital = $73,639,000

Residual income = $6,060,000 - (73,639,000 * 10%)

Residual income = -$1,303,900

Since the residual income of the company is negative, the company's profitability is not good.

NOPAT = $7,423,500

Invested capital = $73,639,000

Residual income = -$1,303,900

The company appears less profitable

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