value: 4.00 points A family friend has asked your help in analyzing the operatio
ID: 2577110 • Letter: V
Question
value: 4.00 points 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 $480,000 $650,000 48,000 $620,000 $166,000 $ 157,000 15% 191% 0 Percentage 13% 13% Dollar amount 43,000 Residual income 5,000Explanation / Answer
SOLUTION
(1)
Company A-
Net Operating income = Average operating assets * ROI
= $166,000 * 15% = $24,900
Minimum required return (dollar) = Average operating assets * Minimum required return
= $166,000 * 13% = $21,580
Residual Income = Net Operating income - Minimum required return
= $24,900 - $21,580 = $3,320
Company B-
Average Operating assets = Net operating income / ROI
= =$48,000 / 19% = $252,632
Minimum required return (percentage) = Minimum required return /Average operating assets
= $43,000 / $252,632 = 17%
Residual Income = Net Operating income - Minimum required return
= $48,000 - $43,000 = $5,000
Company C-
Minimum required return (dollar) = Average operating assets * Minimum required return
= $157,000 * 13% = $20,410
Net operating income = Minimum required return (dollar) + Residual income
= $20,410 + $5,000 = $25,410
ROI = Net operating income / Average operating assets
= $25,410 / 157,000 = 16%
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