Question

Financial data for Joel de Paris, Inc., for last year follow:

Joel de Paris, Inc. Balance Sheet
	Beginning Balance			Ending Balance
Assets
Cash	$	135,000		$	131,000
Accounts receivable		335,000			477,000
Inventory		561,000			484,000
Plant and equipment, net		859,000			838,000
Investment in Buisson, S.A.		409,000			426,000
Land (undeveloped)		255,000			247,000
Total assets	$	2,554,000		$	2,603,000
Liabilities and Stockholders' Equity
Accounts payable	$	385,000		$	344,000
Long-term debt		952,000			952,000
Stockholders' equity		1,217,000			1,307,000
Total liabilities and stockholders' equity	$	2,554,000		$	2,603,000

Joel de Paris, Inc. Income Statement
Sales					$	4,584,000
Operating expenses						3,758,880
Net operating income						825,120
Interest and taxes:
Interest expense	$	126,000
Tax expense		192,000				318,000
Net income					$	507,120

The company paid dividends of $417,120 last year. The “Investment in Buisson, S.A.,” on the balance sheet represents an investment in the stock of another company. The company's minimum required rate of return of 15%.

Required:

1. Compute the company's average operating assets for last year.

2. Compute the company’s margin, turnover, and return on investment (ROI) for last year. (Round "Margin", "Turnover" and "ROI" to 2 decimal places.)

3. What was the company’s residual income last year?

Answer 1

1

Beginning operating assets = 2554000-409000-255000= $1890000

Ending operating assets = 2603000-426000-247000= $1930000

Average operating assets = (1890000+1930000)/2 = $1910000

2

Margin = Net operating income /Sales = 825120/4584000= 18%

Turnover = Sales/Average operating assets = 4584000/1910000= 2.4

Return on investment (ROI) = Margin*Turnover = 18%*2.4= 43.2%

3

Residual income = Net operating income-Minimum required return

Residual income = 825120-(1910000*15%)= $538620