Return on Investment and Residual Income
P 9. The financial results for the past two years for ABB Company, follow.
| ABB Company Balance Sheet December 31 | |||
| This Year | Last Year | ||
| Cash | Assets | $ 9,000 | $ 4,000 |
| Accounts receivable | 40,000 | 50,000 | |
| Inventory | 30,000 | 25,000 | |
| Other current | 1,000 | 1,000 | |
| Plant assets | 120,000 | 100,000 | |
| Total assets | $200,000 | $180,000 | |
| Liabilities and Stockholders’ Equity | ||
| Current liabilities | $ 10,000 | $ 10,000 |
| Long-term Liabilities | 20,000 | 10,000 |
| Stockholders’ equity | 170,000 | 160,000 |
| Total liabilities and stockholders’ equity | $200,000 | $180,000 |
| ABB Company Income Statement For the Years Ended December 31 | |||
| This Year | Last Year | ||
| Sales | $250,000 | $200,000 | |
| Cost of goods sold | 150,000 | 115,000 | |
| Selling and administrative expenses | 30,000 | 25,000 | |
| Operating income | $ 70,000 | $ 60,000 | |
| Income taxes expense | 21,000 | 18,000 | |
| Net income | $ 49,000 | $ 42,000 | |
Required
1.Compute the company’s profit margin, asset turnover, and return on investment for this year and last year. Beginning total assets for last year were $160,000. Round to two decimal places.
2. The desired return on investment for the company has been set at 10 percent. Compute ABB’s residual income for this year and last year.
3. The cost of capital for the company is 5 percent. Compute the company’s economic value added for this year and last year.
4. Before drawing conclusions about this company’s performance, what additional information would you want?
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