Question

Financial data for Redstone Company for last year appear below: Redstone Company Statements of Financial Position Beginning Balance Ending Balance Assets: Cash $ 260,000 $ 217,450 Accounts receivable 157,000 149,000 Inventory 288,000 284,000 Plant and equipment (net) 496,000 450,000 Investment in Balsam Company 233,000 347,000 Land (undeveloped) 335,000 335,000 Total assets $ 1,769,000 $ 1,782,450 Liabilities and owners’ equity: Accounts payable $ 213,000 $ 171,000 Long-term debt 803,000 803,000 Owners’ equity 753,000 808,450 Total liabilities and owners’ equity $ 1,769,000 $ 1,782,450 Redstone Company Income statement Sales $ 2,500,000 Less operating expenses 1,925,000 Net operating income 575,000 Less interest and taxes: Interest expense $ 96,300 Tax expense 224,250 320,550 Net income $ 254,450 The company paid dividends of $199,000 last year. The "Investment in Balsam 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. (Round your intermediate calculations and final answers to 2 decimal places.) b. The Board of Directors of Redstone has set a minimum required return of 45%. What was the company's residual income last year? (Round your intermediate calculations and final answers to 2 decimal places.)

Answer 1

Beginning operating assets = 1769000-233000-335000= $1201000
Ending operating assets = 1782450-347000-335000= $1100450
Average operating assets = (1201000+1100450)/2 = $1150725
a
Margin = Net operating income/Sales = 575000/2500000= 23%
Turnover = Sales/Average operating assets = 2500000/1150725= 2.17
ROI = Margin*Turnover = 23%*2.17= 49.91%
b
Residual income = 575000-(1150725*45%)= $57173.75