Question

Consider the following information for Hiroole Electronics: 12/31/2017 12/31/2018 Total assets $12,553,000 $13,049,600 Noninterest-bearing current liabilities...

Consider the following information for Hiroole Electronics: 12/31/2017 12/31/2018 Total assets $12,553,000 $13,049,600 Noninterest-bearing current liabilities 545,400 623,000 Net income 759,500 801,000 Interest expense 2,307,400 332,100 Tax rate 40% 40% Required rate of return 10% 12% Collapse question part (a) Evaluate the company in terms of residual income (RI), which is equivalent to EVA since there are no adjustments for accounting distortions. (Enter negative answers preceding either - sign, e.g. -45 or in parentheses, e.g. (45).) 2017 2018 Residual income $ $

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Answer #1

Solution:

Computation of Residual income / Economic value added
Particulars 2017 2018
Net Income $759,500.00 $801,000.00
Tax rate 40% 40%
Income before taxes $1,265,833.33 $1,335,000.00
Add: Interest expense $2,307,400.00 $332,100.00
Operating income $3,573,233.33 $1,667,100.00
Net operating profit after tax (Operating income * 60%) $2,143,940.00 $1,000,260.00
Total Assets $12,553,000.00 $13,049,600.00
Non interest bearing current liabilities $545,400.00 $623,000.00
Invested capital (Total assets - current liabilities) $12,007,600.00 $12,426,600.00
Required rate of return 10% 12%
Required return on invested capital $1,200,760.00 $1,491,192.00
Residual income (NOPAT - Required return on invested capita) $943,180.00 -$490,932.00
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