Juan Company's after-tax operating income was $882 million.Average total assets were $5,900 million and average total stockholders' equity was $4,050 million.Juan Company's cost of capital was 10%.Juan Company uses total assets as the measure of invested capital.What is Juan Company's residual income?

Question

Quizplus · Accepted Answer

Residual income is calculated as after-tax operating income minus the charge for the use of capital. The charge for the use of capital is the cost of capital times the amount of invested capital. Here, the after-tax operating income is $882 million, the cost of capital is 10%, and the invested capital (measured by total assets) is $5,900 million. The charge for the use of capital is 10% of $5,900 million, which is $590 million. Therefore, the residual income is $882 million - $590 million = $292 million.

Juan Company's After-Tax Operating Income Was $882 Million