Financial data for Windsor, Inc. for last year appear below: Windsor, Inc Statem
ID: 2580972 • Letter: F
Question
Financial data for Windsor, Inc. for last year appear below: Windsor, Inc Statements of Financial Position Beginning Balance Ending Balance Assets Cash Accounts receivable Inventory Plant and equipment (net) Investment in Pine Company Land (undeveloped) Total assets $ 250,000 S 260,000 135,000 205,000 380,000 250,000 430000 120,000 230,000 420,000 220,000 430,000 Liabilities and owners' equity: Accounts payable Long-term debt. Owners equity Total liabilities and owners' equity $ 160,000 800,000 S 140,000 800,000 720,000 Windsor, Inc Income Statement Sales $1,750,000 Less operating expenses. 280,000 Net operating income. Less interest and taxes Interest expense ax expense Net income $96,000 0000166,000 S 114000 The company paid dividends of $104,000 last year. The "Investment in Pine Company" on the statement of financial position represents an investment in the stock of another compan Required: a. Compute the company's margin, turnover, and return on investment for last year. b, The Board of Directors of Windsor, Inc. has set a minimum required return of 25%, what was the company's residual income last year?Explanation / Answer
Solution:
a)
Company’s Margin = Net Operating Profit after tax / Average Operating Assets x 100
Average Operating Assets = (beginning total asset + Ending total asset) / 2 = (1670000+1660000)/2 = 1,665,000
Net Operating Profit after tax = Net operating income – Tax expense = 280,000 – 70,000 = $210,000
Company’s Margin = $210,000 / 1,665,000 x 100 = 12.61%
Turnover = Sales / Average Total Assets
= 1,750,000 / 1,665,000
= 1.05 times
Return On Investment = Company’s Margin x Turnover = 12.61 x 1.05 = 13.24%
b)
Minimum Required Rate of Return = 25%
Minimum Required Return = Average Total Assets x Minimum Required Rate of Return
= 1,665,000 x 25%
= $416,250
Residual Income = Net Operating Income after tax – Minimum Required Return
= 210,000 – 416,250
= -206,250
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