Exercise 9-9 Retun on Investment (ROI) and Residual Income Relations [L09-1, LO9

Question

Exercise 9-9 Retun on Investment (ROI) and Residual Income Relations [L09-1, LO9-2] A family friend has asked your help in analyzing the operations of three anonymous companies operating in the same service sector industry. Supply the missing data in the table below: (Loss amounts should be indicated by a minus sign. Enter your ROI and Rate of Return Percentage answers to the nearest percentage (i.e., 0.12 should be entered as 12).) Company S 800,000 $ 44,000 $ 500,000 $ 590,000 Sales Net operating income Average operating assets Return on investment (ROI) Minimum required rate of return: $167,000 $ 156,000 21% 16% 131% 000 12% Percentage Dollar amount 59,000 8,000 Residual income

Explanation / Answer

Calculate missing amount :

Company A Company B Company C Sales 500000 800000 590000 Net operating income 167000*21% = 35070 44000 20280+8000 = 28280 Average operating assets 167000 44000*100/16 = 275000 156000 Return on investment 21% 16% 28280*100/156000 = 18% Minimum required rate of return Percentage 12% 59000*100/275000 = 21% 13% Dollar amount 167000*12% = 20040 59000 156000*13% = 20280 Residual income 35070-20040 = 15030 44000-59000 = -15000 8000

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