Rail Star Company reported the following results for 2014: Sales $6,000,000 Inve
ID: 2478074 • Letter: R
Question
Rail Star Company reported the following results for 2014: Sales $6,000,000 Investment turnover 2.4 Return on investment 10% Given this information, how much is the company’s invested capital? a. $2,500,000 b. $1,440,000 c. $600,000 d. None of the above.
QUESTION 2 The following data pertains to the Retail Division of Motor Express: Sales $700,000 Invested capital 200,000 Net operating profit after taxes 49,000 Noninterest-bearing current liabilities 20,000 The minimum rate of return specified by Motor Express is 12 percent and the cost of capital is 8 percent. How much is residual income? a. $33,000 b. $25,000 c. $27,400 d. $34,600
Explanation / Answer
1) a) $2,500,000 Sales = $6,000,000 Investment turnover = Sales / Investment = 2.4 2.4 = $6,000,000 / Investment Investment = $6,000,000/2.4 = $2,500,000 Residual Income (RI) = A - (B × C) In the above formula, A = Department's net operating income = 49,000 B = Minimum required return = 12% C = 200,000 Residual Income (RI) = 49,000 (12% of 200,000) = $27,400
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