Exercise 99 Retun on Investment ROI and Residual Income Rela

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

Solution

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