Financial data for Redstone Company for last year appear below: Redstone Company

Question

Financial data for Redstone Company for last year appear below: Redstone Company Statements of Financial Position Beginning Balance Ending Balance Assets Cash Accounts receivable Inventory Plant and equipment (net) Investment in Balsam Company Land (undeveloped) $ 341,000 $ 336,590 192,000 251,000 385,000 257,000 301,000 188,000 260,000 448,000 315,000 301,000 Total assets $1,853,000 $1,722,590 Liabilities and owners' equity: Accounts payable Long-term debt Owners' equity $ 203,000 892,000 758,000 206,000 892,000 624,590 Total liabilities and owners' equity $1,853,000 $1,722,590 Redstone Company Income statement Sales Less operating expenses $2,350,000 2,103,250 246,750 Net operating income Less interest and taxes Interest expense $99,200 78,960 Tax expense 178,160 Net income $ 68,590 The company paid dividends of $202,000 last year. The "Investment in Balsam Company" on the statement of financial position represents an investment in the stock of another company

Explanation / Answer

a) Margin = Net income / sales = 68590/2350000 = 2.92% Turnover ratio = Sales / Invested capital = 2350000/624590 = 3.76 or Turnover ratio = Sales / Average Invested capital = 2350000/((758000+624590)/2) = 3.4 ROI = Sales margin / Turnover ratio = 2.92/3.76 = 77.66% or 2.92/3.4 = 85.88% b) Residual income = Net operating income - (Average operating assets*minimum required rate of return) Operating assets at the beginning = 341000+188000+260000+448000 = $1237000 Operating assets at the end = 336590+192000+251000+385000 = $1164590 Average operating assets = (1237000+1164590)/2 = $1200795 = 68590-1200795*18% = $-147553

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