53) Managerial Financial Accounting Assignments AE12-11 Solution

53) Managerial Financial Accounting Assignments AE12-11 Solution

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AE12-11
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Incorrect. Evaluating Investment Centers with Residual Income [LO 6] Lakeside Hospital is a division of Superior Healthcare organized as an investment center. In the past year, the hospital reported an after-tax income of $2,600,000. Total Interest expense was $1,910,000 and the hospital's tax rate was 38 percent. Hospital assets totaled $33,700,000 and noninterest-bearing current liabilities were $9,230,000. Superior has established a required rate of return equal to 18 percent of invested capital. Calculate the residual income/EVA of Lakeside Hospital. (For negative numbers use either a negative sign preceding the number, e.g. -45 or parenthesis, e.g. (45).)
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Unformatted text preview: Residual income/EVA $[no answer] Click here if you would like to Show Work for this question NOPAT = Net income + Interest expense – Tax savings related to the interest expense = Net income + interest expense (1 – tax rate) = $2,600,000 + $1,910,000 (1 – 0.38) = $3,784,200 Invested capital = Total assets – noninterest-bearing current liabilities = $33,700,000 – $9,230,000 = $24,470,000 Residual Income/EVA = NOPAT – (Cost of capital × Invested capital) = $3,784,200 – (0.18 × $24,470,000) = $3,784,200 – $4,404,600 = ($620,400)...
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