Question

In its 2015 fiscal year annual report, Texas Roadhouse reports net operating income after tax (NOPAT) of $102,495 thousand. As of the beginning of fiscal year 2015 it reports net operating assets of $596,104 thousand.

a. Did Texas Roadhouse earn positive residual operating income (ROPI) in 2015 if its weighted average cost of capital (WACC) is 7%. Explain

1. TXRH earned a negative ROPI because the realized NOPAT exceeds the expected NOPAT.
2. TXRH earned a positive ROPI because the realized NOPAT was less than the expected NOPAT.
3. TXRH earned a positive ROPI because the realized NOPAT exceeds the expected NOPAT.V
4. TXRH earned a negative ROPI because the realized NOPAT was less than the expected NOPAT.

b. At what level of WACC would Texas Roadhouse not report positive residual operating income for 2015?

Answer 1

Answer:

a. 3. TXRH earned a positive ROPI because the realized NOPAT exceeds the expected NOPAT.

b. ROPI which is 17.9% will be in negative

Explanation:

a. The explanation of positive residual operating income is here below:-

Expected net operating income after tax = Operating asset × Weighted average cost of capital

= $596,104 × 7%

= $41,727.28

Therefore the actual net operating income after tax is higher than Expected net operating income after tax.

TXRH earned a positive ROPI because realized net operating income after tax is higher than Expected net operating income after tax

b. For ROPI to be 0, Weighted average cost of capital

Realised net operating income after tax = Operating asset × weighted average cost of capital

= $102,495 = $596,104 × weighted average cost of capital

weighted average cost of capital = 17.19%

So, The ROPI which is 17.9% will be in negative