Coral has a profit margin of 16% based on revenues of $400,000 and an investment turnover is 2. What is the residual income when the cost of capital is 10%?
A) $44,000
B) $20,000
C) $40,000
D) $64,000

Question

Quizplus · Accepted Answer

Residual income is calculated as Net Operating Income - (Investment * Cost of Capital). Net Operating Income is $64,000 (16% of $400,000). Investment is $200,000 (Revenues/Investment Turnover). Cost of Capital is 10% of $200,000, which is $20,000. Residual Income = $64,000 - $20,000 = $44,000.

Coral Has a Profit Margin of 16% Based on Revenues