Question

Financial data for Beaker Company for last year appear below:

Beaker Company
Statements of Financial Position
	Beginning Balance			Ending Balance
Assets:
Cash	$	266,000		$	725,370
Accounts receivable		195,000			138,000
Inventory		328,000			285,000
Plant and equipment (net)		475,000			380,000
Investment in Cedar Company		281,000			333,000
Land (undeveloped)		194,000			194,000
Total assets	$	1,739,000		$	2,055,370
Liabilities and owners' equity:
Accounts payable	$	170,000		$	226,000
Long-term debt		846,000			846,000
Owners' equity		723,000			983,370
Total liabilities and owners' equity	$	1,739,000		$	2,055,370

Beaker Company
Income Statement
Sales				$	2,390,000
Less operating expenses					1,696,900
Net operating income					693,100
Less interest and taxes:
Interest expense	$	101,800
Tax expense		207,930			309,730
Net income				$	383,370

The company paid dividends of $123,000 last year. The "Investment in Cedar 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 Beaker Company has set a minimum required return of 45%. What was the company's residual income last year?

Answer 1

Margin = NOI / sales = 693100/2390000 = 29%

Turnover = sales / avg. Operating assets =2390000 /1396185 = 1.71

Return on investment = margin * turnover = 29 * 1.71 = 49.6%

Residual income = operating income - (MRR * avg. Operating assets)

=693,100 - (45% * 1,396,185)

=693,100 - 628,283

=64817. Profit

NOTE : the land (undeveloped) and investment in other companies should not be included, while caluclating average operating assets.

The amount of investment in other companies and land value is deducted.and the avg. Operating assets is caluclated as follows :

Avg operating assets = (1264000 + 1528370)/2 =1,396,185