The following data has been provided for a compan most recent year of operations:

Return on investment 40 %

Average operating assets $ 45,000

Minimum required rate of return 19 %

The residual income for the year was closest to:

Multiple Choice:

A. $9,450

B. $17,000

C. $12,600

D. $10,500

It is $9,450 (A)

Explanation:

Return on Investment = 40% * $ 45,000

=$18,000

Minimum Required Return = 19% * $ 45,000

= $8,550

Hence, Residual Income = $18,000-$8,550

=$9,450

Minimum required return represents the amount of returns that must be generated on investment to satisfy the expectations of providers of funds.

Residual income is what is left after dividends and interest have been paid to the various investors which can be retained for future investment.