A family friend has asked your help in analyzing the operations of three anonymo

Question

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 ROl and Rate of Return Percentage answers to the nearest percentage (i.e., 0.12 should be entered as 12).) Company Sales Net operating income Average operating assets Return on investment (ROI) Minimum required rate of return: $ 390,000 $ 820,000 $ 37,000 680,000 $ 170,000 $ 147,000 171% 171% 171% Percentage Dollar amount 101% $ 55,000 Residual income 7,000

Explanation / Answer

Missing figures of Company A :

1. Net Operating Income = Average Operating Assets x ROI

Therefore NOI of Co. A = $170000 x 17% = $28,900

2. Minimum Required rate of return ($) = Average Operating Assets x Min req rate of return (%)

Therefore Min Req Rate of return = 170000 x 17% = $28,900

3. Residual Income = Net Operating Income - Min req rate of return

Residual Income = $28900 - $28900 = 0

Missing Figures of Company B:

1. Average Operating Assets = Net Operating Income / ROI

Therefore Average Operating Assets of Co. B = 37000 / 17% = $217,647

2. Minimum req rate of return (%) = Min req rate of return ($) / Average operating assets

Therefore Min req rate of return (%) = $55,000 / $217,647 = 25.5%

3. Residual Income =  Net Operating Income - Min req rate of return

Residual Income = $37,000 - $55,000 = ($18,000)

Missing Figures of Company C:

1.  Minimum Required rate of return ($) = Average Operating Assets x Min req rate of return (%)

Therefore Min req rate of return ($) = $147000 x 10% = $14,700

2. Net Operating Income = Min req rate of return + Residual Income

  Net Operating Income = $14700 + $7000 =$21,700

3. Return on Investment = Net Operating Income / Average operating Assets

ROI = $21,700 / $147,000 = 14.8%

The following table incorporates all the missing data:

Company A B C Sales $390,000 $820,000 $680,000 Net Operating Income $28,900 $37,000 $21,700 Average Operating Assets $170,000 $217,647 $147,000 Return on Investment (ROI) 17% 17% 14.80% Minimum required rate of return: Percentage 17% 25.50% 10% Dollar Amount $28,900 $55,000 $14,700 Residual Income 0 ($18,000) $7,000

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