. Financial data for Deep Blue Saline Ltd. for last year appear below: Deep Blue Saline Ltd. Balance Sheet Beginning Ending Assets: Balance Balance Cash $110,000 $143,000 Accounts receivable 115,000 100,000 Inventory 60,000 60,000 Plant and equipment (net) 190,000 160,000 Investment in Balsam Company 45,000 55,000 Land (undeveloped) 110,000 110,000 Total assets $630,000 $628,000 Liabilities and owners’ equity: Accounts payable $ 80,000 $ 90,000 Long-term debt 470,000 450,000 Owners’ equity 80,000 88,000 Total liabilities and owners’ equity $630,000 $628,000 Deep Blue Saline Ltd. Income Statement Sales $1.088,000 Less operating expenses 975,00 Net operating income 113,000 Less interest and taxes: Interest expense $60,000 Tax expense 20,000 80,000 Net income $ 33,000 The company paid dividends of $25,000 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. b. The Board of Directors of Deep Blue Saline has set a minimum required return of 20%. What was the company's residual income last year?
| Sales | $ 1,088,000.00 |
| Operating Expenses | $ 975,000.00 |
| Operating Income | $ 113,000.00 |
| Less: Interest | $ 60,000.00 |
| Tax | $ 20,000.00 |
| Net Income | $ 33,000.00 |
| Margin= Profit/ Sales |
| Margin= $33000/$1088000 |
| Margin= 3.03% |
| Turnover Ratio= Sales/Average stock |
| Turnover Ratio= 10,88,000/((60,000+60,000)/2) |
| Turnover Ratio= 18.13 |
| Return on Investment= Profit/ Cost of investment |
| Return on Investment= $33,000/$88,000 |
| Return on Investment= $33,000/$88,000 |
| Return on Investment= 37.5% |
| Residual Income= Operating Income- Desired income |
| Where desired income= Minimum required rate of return x Average Operating assets |
| Desired Income= 20%* 4,69,000 |
| Desirede Income= $ 93,800 |
| Operating Assets= Cash+Accounts receivable+Inventory+fixed assets |
| Operating Assets at beginning of year= 110000+115000+60000+190000 |
| Operating Assets at beginning of year= $4,75,000 |
| Operating Assets at end of year= 143000+100000+60000+160000 |
| Operating Assets at end of year= $ 4,63,000 |
| Average Operating Assets=(4,75,000+4,63,000)/2 |
| Average Operating Assets= $ 4,69,000 |
| Residual Income= Operating Income- Desired income |
| Where desired income= Minimum required rate of return x Average Operating assets |
| Desired Income= 20%* 4,69,000 |
| Desirede Income= $ 93,800 |
| Residual Income= $1,13,000- $93,800 |
| Residual Income= $ 19,200 |
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