Question

Financial data for Redstone Company for last year appear below:

Redstone Company Statements of Financial Position
	Beginning Balance		Ending Balance
Assets:
Cash	$	303,000	$	337,392
Accounts receivable		169,000		217,000
Inventory		242,000		238,000
Plant and equipment (net)		481,000		407,000
Investment in Balsam Company		256,000		308,000
Land (undeveloped)		280,000		280,000
Total assets	$	1,731,000	$	1,787,392
Liabilities and owners’ equity:
Accounts payable	$	171,000	$	188,000
Long-term debt		810,000		810,000
Owners’ equity		750,000		789,392
Total liabilities and owners’ equity	$	1,731,000	$	1,787,392

Redstone Company Income statement
Sales			$	2,220,000
Less operating expenses				1,687,200
Net operating income				532,800
Less interest and taxes:
Interest expense	$	103,600
Tax expense		191,808		295,408
Net income			$	237,392

The company paid dividends of $198,000 last year. The "Investment in Balsam Company" on the statement of financial position represents an investment in the stock of another company

Required:

a. Compute the company's margin, turnover, and return on investment for last year. (Round your intermediate calculations and final answers to 2 decimal places.)

Margin%TurnoverReturn on investment%

b. The Board of Directors of Redstone has set a minimum required return of 40%. What was the company's residual income last year? (Round your intermediate calculations and final answers to 2 decimal places.)

	Residual income

Answer 1

Part-a

Net Operating Margin

Net Opearting Income/Net sales

532800/2220000*100= 24%

Total operating asset Turnover

Net Sales/Average opearting assets

=2220000/1197196= 1.85

Return On Investment

Net Operating Income/Average Opearting assets*100

=532800/1197196= 44.5%

Net Profit Margin=Net Income/Sales*100

=237392/2220000= 10.69%

Total Asset Turnover

Net Sales/Average Total assets

=2220000/((1731000+1787392)/2)=1.26

Part-b

Residual Income

Net opearting Income-(Minimum required rate*Average opearting assets)

=532800-(0.4*1197196)=53922

* Average Operating Asset:= (1731000+1787392-280000-280000-256000-308000)/2

Note land(underdeveloped) and investment are not operating assets