Question

In: Accounting

Consider the following for Executive Electronics Total Assets: 2017- 12,650,000 and 2018- 12,100,000 Noninterest-bearing current liabilities:...

Consider the following for Executive Electronics

Total Assets: 2017- 12,650,000 and 2018- 12,100,000

Noninterest-bearing current liabilities: 2017-550,000 and 2018- 572,000

Net income: 2017- 770,000 and 2018- 880,000

Interest Expense: 2017- $2,310,000 and 2018- 330,000

Tax Rate: 2017- 40% and 2018-40%

Required rate of return: 2017- 10% and 2018-12%

Evaluate the company in terms of residual income (RI) which is equivalent to EVA since there are nonadjustments for accounting distortions.

Residual income 2017:

Residual income 2018:

Expert Solution

For 2017

Net income = $770,000

Interest expense = $2,310,000

Tax rate = 40%

Income before tax = Net income / (1- tax rate)

= 770,000 / (1-0.4)

= 770,000/0.6

= $1,283,333

Operating income = Income before tax + Interest expense

= 1,283,333+2,310,000

= $3,593,333

Required rate of return = 10%

Total assets = $12,650,000

Residual income = Operating income- (Total assets x Required rate of return)

= 3,593,333- (12,650,000 x 10%)

= 3,593,333-1,265,000

= $2,328,333

For 2018

Net income = $880,000

Interest expense = $330,000

Tax rate = 40%

Income before tax = Net income / (1- tax rate)

= 880,000 / (1-0.4)

= 880,000/0.6

= $1,466,667

Operating income = Income before tax + Interest expense

= 1,466,667+330,000

= $1,796,667

Required rate of return = 12%

Total assets = $12,100,000

Residual income = Operating income- (Total assets x Required rate of return)

= 1,796,667- (12,100,000 x 12%)

= 1,796,667-1,452,000

= $344,667

Residual income 2017:$2,328,333

Residual income 2018:$344,667

Kindly comment if you need further assistance. Thanks

ekkarill92 answered 2 years ago

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