Financial data for Beaker Company for last year appear below: The company paid d

Question

Financial data for Beaker Company for last year appear below:

The company paid dividends of $200,000 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 25%. What was the company's residual income last year?

Beaker Company Statements of Financial Position Beginning Balance Ending Balance Assets: Cash $ 346,000 $ 324,792 Accounts receivable 202,000 159,000 Inventory 298,000 299,000 Plant and equipment (net) 463,000 455,000 Investment in Cedar Company 318,000 293,000 Land (undeveloped) 237,000 237,000 Total assets $ 1,864,000 $ 1,767,792 Liabilities and owners' equity: Accounts payable $ 249,000 $ 228,000 Long-term debt 855,000 855,000 Owners' equity 760,000 684,792 Total liabilities and owners' equity $ 1,864,000 $ 1,767,792

Explanation / Answer

Beginning operating assets = 1864000-318000-237000= 1309000 Ending operating assets =1767792-293000-237000= 1237792 Average operating assets = (1309000+1237792)/2= 1273396 1 Margin = Net operating income /Sales = 349050/1790000= 19.50% Turnover = Sales/Average operating assets = 1790000/1273396= 1.41 (rounded off) Return on investment =Margin*Turnover =19.5%*1.41= 27.50% (if turnover is not rounded off ROI will be 27.41%) 2 Net operating income 349050 Minimum required return 318349 =1273396*25% Residual income 30701

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