Financial data for Guyer Corporation, for last year follow:
Guyer Corporation Balance Sheet |
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Beginning Balance |
Ending Balance |
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Assets | ||||||
Cash | $ | 140,000 | $ | 120,000 | ||
Accounts receivable | 450,000 | 530,000 | ||||
Inventory | 320,000 | 380,000 | ||||
Plant and equipment, net | 680,000 | 660,000 | ||||
Investment in ABC, Inc. | 250,000 | 280,000 | ||||
Land (undeveloped) | 180,000 | 170,000 | ||||
Total assets | $ | 2,020,000 | $ | 2,140,000 | ||
Liabilities and Stockholders' Equity | ||||||
Accounts payable | $ | 360,000 | $ | 310,000 | ||
Long-term debt | 1,500,000 | 1,500,000 | ||||
Stockholders' equity | 160,000 | 330,000 | ||||
Total liabilities and stockholders' equity | $ | 2,020,000 | $ | 2,140,000 | ||
Guyer Corporation Income Statement |
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Sales | $ | 4,050,000 | |||||||
Operating expenses | 3,640,000 | ||||||||
Net operating income |
410,000 |
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Interest and taxes: | |||||||||
Interest expense | $ | 150,000 | |||||||
Tax expense | 110,000 | 260,000 | |||||||
Net income | $ | 150,000 | |||||||
The company paid dividends of $15,000 last year. The “Investment in
ABC, Inc.” on the balance sheet represents an investment in the
stock of another company. The company's minimum required rate of
return of 8%.
What was the company’s residual income last year?
Answer:
Beginning Operating Assets = Cash + Accounts Receivable +
Inventory + Plant and Equipment
Beginning Operating Assets = $140,000 + $450,000 + $320,000 +
$680,000
Beginning Operating Assets = $1,590,000
Ending Operating Assets = Cash + Accounts Receivable + Inventory
+ Plant and Equipment
Ending Operating Assets = $120,000 + $530,000+ $380,000 +
$660,000
Ending Operating Assets = $1,690,000
Average Operating Assets = (Beginning Operating Assets + Ending
Operating Assets)/2
Average Operating Assets = ($1,590,000 + $1,690,000)/2
Average Operating Assets = $1,640,000
Residual Income = Net Operating Income - (Minimum Required
Return * Average Operating Assets)
Residual Income = $410,000 - (8% * $1,640,000)
Residual Income =$410,000 - $131,200
Residual Income = $278,800
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