Year 0 sales of XYZ firm are $124.9 million. Sales are expected to grow at 6% from their year 0 level. Core operating profit margin is expected to be 8%. Asset turnover on beginning of period NOA is expected to be 1.8. The payout ratio is expected to be 40%. The required return on operations is 10% and the after tax cost of debt is 4%. The following forecasts were made:

What is the expected residual operating income in year 2?

	a.	$3.15 million
	b.	$3.43 million
	c.	$3.64 million
	d.	$3.85 million
	e.	none of the above

Sales (growing at 6%) Operating income (PM = 0.08) NOA ReOl (10% charge) Growth rate for ReOl Year 0 124.90 9.80 74.42 Year 1 132.39 10.59 Year 2 140.34 11.23 Year 3 148.76 11.90