PA4. LO 12.3 Jefferson Memorial Hospital is an investment center as a division of Hospitals United. During the past year, Jefferson reported an after-tax operating income of $7 million. Total interest...

PA4. LO 12.3 Jefferson Memorial Hospital is an investment center as a division of Hospitals United. During the past year, Jefferson reported an after-tax operating income of $7 million. Total interest expense was $3,200,000, and the hospital tax rate was 30%. Total assets totaled $70 million, and non-interest-bearing current liabilities were $22,800,000. The required rate of return established by Jefferson is equal to 18% of invested capital. What is the residual income of Jefferson Memorial Hospital? Note the following:

• Invested Capital = Total Assets – Non-Interest-Bearing Current Liabilities

• Net Operating Income after Taxes = Net Income + Interest Expense – Tax Savings Related to Interest Expense

• Residual Income = Net Operating Income after Tax – (18% Cost of Capital × Invested Capital) Solution