exercise 11-9 Return on Investment (ROI) and Residual Income Relations [LO11-1,

Question

exercise 11-9 Return on Investment (ROI) and Residual Income Relations [LO11-1, LO11-2]

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. Round your percentage answers to nearest whole percent)

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. Round your percentage answers to nearest whole percent)

Explanation / Answer

Comapny A= Net incme : Average asset * ROI

                                       = 160000 * .17 = 27200

Dollar amount :Asset invested * Minimum rate

                    = A160000* .17 = 27200

Resisual income =Net income -Dollar amount

                   = 27200-27200 = 0

company B:

Average asset = Net income / ROI

                     = 37000 / .17 = $ 217647.06

%minimum rate = Dollar amount /asset invested

                     = 60000/ 217647.06

                      = 27.56%   or 28%   rounded to whole place

Residual income = 3700 0 -60000 = - 23000

company C:

Minimum dollar return =146000*.12 = 17520

Residual income = Net operating income -Minimum return

6000 = NOI - 17520

NOI = 17520+6000 = 23520

ROI = 23520 / 146000 = 16% rounded

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