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19 June, 19:59

Garcia Company reports the following information: Net operating income after taxes $100,000 Before-tax operating income $300,000 Average invested capital $500,000 After-tax cost of capital 10% What is the residual income for Garcia Company? A) $30,000 B) $50,000 C) $250,000 D) $450,000

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  1. 19 June, 20:11
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    B) $50,000

    Explanation:

    Cost of Capital is the rate which is required by the capital investment by the shareholders or owners of the business. Residual Income is the portion of net income after paying the investors of the company. This income is reinvested or retained by the business.

    Net operating Income after tax = $100,000

    Average Invested Capital = $500,000

    Cost of Capital = $500,000 x 10% = $50,000

    Residual Income = Net Income - Cost of capital

    Residual Income = $100,000 - $50,000

    Residual Income = $50,000
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