Which of the Following Is the Correct Formula to Compute

question 69

Multiple Choice

Which of the following is the correct formula to compute residual income?

• A) Average operating assets - Net operating income
• B) Average operating assets - (Net operating income ´ Minimum required rate of return)
• C) Net operating income ´ Minimum required rate of return
• D) Net operating income - (Average operating assets ´ Minimum required rate of return)

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Definitions:

Retained Earnings

Represents the portion of a company's profits not distributed as dividends to shareholders but instead reinvested in the business.

Free Cash Flow

This is a financial performance measure that shows how much cash a company generates after accounting for cash outflows to support operations and maintain its capital assets.

Management Bonuses

Additional compensation awarded to executives and managers, often tied to performance metrics such as company profitability or achievement of specific goals.

Bond Holders

Individuals or institutions that own bonds, which are debt securities issued by corporations or governments.