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Problem 12.4 (LO2) Residual Income/Economic Value Added Consider the following information for Executive Electronics: 12/31/2020 12/31/2021 Total assets $12,650,000 $12,100,000 Noninterest-bearing current liabilities 550,000
Problem 12.4 (LO2) Residual Income/Economic Value Added Consider the following information for Executive Electronics: 12/31/2020 12/31/2021 Total assets $12,650,000 $12,100,000 Noninterest-bearing current liabilities 550,000 572,000 Net income 770,000 880,000 Interest expense 2,310,000 330,000 Tax rate 20% 20% Required rate of return 10% 12% Required a. Evaluate the company's performance for 2020 and 2021 in terms of residual income (RI), which is equivalent to EVA since there are no adjustments for accounting distortions. b. While income has increased in fiscal 2021, is it clear that the company's performance has improved? c. (Optional) Explain why the required rate of return increased in fiscal 2021. (Hint: Note that while total assets are approximately the same in both years, interest expense has declined sharply in 2021.)
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