Question

Financial data for Beaker Company for last year appear below: Beaker Company Statements of Financial Position...

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?

Homework Answers

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

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