Question

Financial data for Redstone Company for last year appear below:

Redstone Company
Statements of Financial Position

Beginning
Balance

Ending
Balance

  Assets:

  Cash

$

335,000

$

471,760  

  Accounts receivable

210,000

176,000

  Inventory

296,000

264,000

  Plant and equipment (net)

508,000

460,000

  Investment in Balsam Company

229,000

295,000

  Land (undeveloped)

182,000

182,000

  Total assets

$

1,760,000

$

1,848,760  

  Liabilities and owners’ equity:

  Accounts payable

$

190,000

$

235,000

  Long-term debt

833,000

833,000

  Owners’ equity

737,000

780,760

  Total liabilities and owners’ equity

$

1,760,000

$

1,848,760

Redstone Company
Income statement

  Sales

$

2,050,000

  Less operating expenses

1,517,000

  Net operating income

533,000

  Less interest and taxes:

   Interest expense

$

96,700

     Tax expense

202,540

299,240

  Net income

$

233,760

The company paid dividends of $190,000 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.)

Margin		%
Turnover
Return on investment		%

b.	The Board of Directors of Redstone has set a minimum required return of 35%. What was the company's residual income last year? (Round your intermediate calculations and final answers to 2 decimal places.)

Residual income

Answer 1

Beginning operating assets = 1760000-229000-182000= $1349000
Ending operating assets = 1848760-295000-182000= $1371760
Average operating asstes=(1349000+1371760)/2 = $1360380
a
Margin = Net operating income/Sales = 533000/2050000= 26%
Turnover = Sales/Average operating assets = 2050000/1360380= 1.51
Return on investment = Margin*Turnover = 26%*1.51= 39.26%
b
Residual income = 533000-(1360380*35%)= $56867