Financial data for Beaker Company for last year appear below: Beaker Company Sta

Question

Financial data for Beaker Company for last year appear below:

Beaker Company
Statements of Financial Position
Balance Balance
Assets:
Cash................................... $50000 $70000
Accounts receivable................ 20000 25000
Inventory............................. 30000 35000
Plant & Equipment (net)........... 120000 110000
Investment in Cedar Company.... 80000 100000
Land (undeveloped)................ 170000 170000
_____________________
Total Assets.......................... $470000 $510000
______________________
Liabilities and owners' equity:
Accounts payable.................... $70000 $90000
Long-term debt...................... 250000 250000
Owners' equity....................... 150000 170000
____________________
Total Liabilities and owners' equity $470000 $510000
____________________
Income Statement
Sales.................................. $414000
Less operating expenses........... 351900
______
Net operating income.............. $62100
Less interest and taxes:
Interest expense................. $30000
Tax expense...................... 10000 40000
_____________
Net income......................... $22100

The company paid dividends of $2,100 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 20%. What was the company's residual income last year?

Explanation / Answer

a. Company's margin turnover = Net income / Sales                                           = 22,100 / 414,000                                           = 5.33% Return on Investment = Net Income+ Interest(1-tax rate ) / Book value of Assets                                  = 62,100 + 30,000(1-0.64) / 490,000                                 = 14.87% Tax rate has been calculated as: Tax expense / Net Income for the period; Book Value of Assets has been taken as the average of the assets of two periods; ($470000 + $510000)/2 = $490,000 b.Residual Income = Net operating Income - (required rate of return * average operating assets) Average operating assets =[{ $470,000 - $170,000(land) - $80,000(investment)} + {$510,000 - $170,000(land) - $100,000(investment)}]/2 = ($220,000 + $240,000)2 =$230,000 Residual Income = $62,100 - (0.20 * $230,000) = $16100 a. Company's margin turnover = Net income / Sales                                           = 22,100 / 414,000                                           = 5.33% Return on Investment = Net Income+ Interest(1-tax rate ) / Book value of Assets                                  = 62,100 + 30,000(1-0.64) / 490,000                                 = 14.87% Tax rate has been calculated as: Tax expense / Net Income for the period; Book Value of Assets has been taken as the average of the assets of two periods; ($470000 + $510000)/2 = $490,000 b.Residual Income = Net operating Income - (required rate of return * average operating assets) Average operating assets =[{ $470,000 - $170,000(land) - $80,000(investment)} + {$510,000 - $170,000(land) - $100,000(investment)}]/2 = ($220,000 + $240,000)2 =$230,000 Residual Income = $62,100 - (0.20 * $230,000) = $16100

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