Question

Financial data for Bridger Inc. for last year are as follows:

BRIDGER INC. Balance Sheet
	Ending Balance			Beginning Balance
Assets
Cash	$	154,000		$	149,000
Accounts receivable		400,000			260,000
Inventory		410,000			490,000
Plant and equipment, net		686,000			731,000
Investment in Brier Company		490,000			460,000
Land (undeveloped)		310,000			310,000
Total assets	$	2,450,000		$	2,400,000
Liabilities and Shareholders’ Equity
Accounts payable	$	200,000		$	250,000
Long-term debt		1,000,000			1,000,000
Shareholders’ equity		1,250,000			1,150,000
Total liabilities and shareholders’ equity	$	2,450,000		$	2,400,000

BRIDGER INC. Income Statement
Sales				$	4,100,000
Operating expenses					3,567,000
Operating income					533,000
Interest and taxes:
Interest expense	$	124,000
Tax expense		204,000			328,000
Net income				$	205,000

The company paid dividends of $100,000 last year. The “Investment in Brier Company” on the balance sheet represents an investment in the common shares of another company.

Required:
1.Compute the company’s margin, turnover, and ROI for last year. (Round your intermediate calculations and final answers to 1 decimal place.)

2. The board of directors of Bridger Inc. has set a minimum required return of 18%. What was the company’s residual income last year?

Answer 1

1. Compute the company’s margin, turnover, and return on investment (ROI) for last year.

Margin = Net Operating Income/Sales = 533,000 / 4,100,000 = 0.1793 = 13% is the margin.

Turnover = Sales / Average Operating Assets

	Beginning Balance	Ending balance
Cash	154,000	149,000
Accounts receivable	400,000	260,000
Inventory	410,000	490,000
Plant and equipment, net	686,000	731,000
Total Operating Assets	1,650,000	1,630,000

Average Operating Assets = Beginning Balance + Ending balance / 2 = 1,650,000 + 1,630,000 / 2 = 1,640,000

Turnover = Sales / Average Operating Assets= 4,100,000 / 1,640,000 = 2.50 is the turnover of the company.

return on investment (ROI) = Margin x Turnover = 13% * 2.5 = 32.5% is the return on investment.

2. minimum required return of 18%.

Net Operating Income	$533,000
Less:Minimum Required Return (18% * 1,640,000)	(295200)
Residual Income	$237800