Return on Investment and Residual Income Johnson Company has two sources of funds: long-term debt and...

3.7 Ratings (449 Votes)

(a)

Return on investment ( Net income/ Assets)

	Net Income	Assets	Return on investment ( Net income/ Assets)
Las Vegas	$1,310,000	$4,000,000	1,310,000/4,000,000 = 33%
Dallas	1,550,000	8,000,000	1,550,000/8,000,000 = 19%
Tampa	2,390,000	12,000,000	2,390,000/12,000,000 = 20%

(b)

Required rate of return = 5%

Residual income = Net Income - ( Assets x Required rate of return)

	Net Income	Assets	Residual income = Net Income - ( Assets x Required rate of return)
Las Vegas	$1,310,000	$4,000,000	1,310,000- (4,000,000 x 5%)= 1,110,000
Dallas	1,550,000	8,000,000	1,550,000- (8,000,000 x 5%)= 1,150,000
Tampa	2,390,000	12,000,000	2,390,000 - (12,000,000 x 5%)= 1,790,000

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Thanks!!!

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