Question

Problem 11-15 Return on Investment (ROI) and Residual Income [LO11-1, LO11-2]

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

Joel de Paris, Inc. Balance Sheet
	Beginning Balance		Ending Balance
Assets
Cash	$	133,000	$	139,000
Accounts receivable		339,000		488,000
Inventory		567,000		484,000
Plant and equipment, net		791,000		759,000
Investment in Buisson, S.A.		402,000		427,000
Land (undeveloped)		247,000		247,000
Total assets	$	2,479,000	$	2,544,000
Liabilities and Stockholders' Equity
Accounts payable	$	372,000	$	346,000
Long-term debt		1,014,000		1,014,000
Stockholders' equity		1,093,000		1,184,000
Total liabilities and stockholders' equity	$	2,479,000	$	2,544,000

Joel de Paris, Inc. Income Statement
Sales		$	4,070,000
Operating expenses			3,418,800
Net operating income			651,200
Interest and taxes:
Interest expense	$ 123,000
Tax expense	198,000		321,000
Net income		$	330,200

     The company paid dividends of $239,200 last year. The “Investment in Buisson, S.A.,” on the balance sheet represents an investment in the stock of another company.

Required:
1.	Compute the company’s margin, turnover, and return on investment (ROI) for last year. (Round your answers to 2 decimal places.)

       

Margin
TurnOver
ROI

2.	The board of directors of Joel de Paris, Inc., has set a minimum required rate of return of 21%. What was the company’s residual income last year?

   

Net Operating Income
Min required return
Residual Income

Answer 1

1

Operating assets do not include Investment in Buisson, S.A. and Land

Beginning operating assets = 2479000-402000-247000= $1830000

Ending operating assets = 2544000-427000-247000= $1870000

Average operating assets =(1830000+1870000)/2 = $1850000

1

Margin = Net operating income/Sales = 651200/4070000= 16%

TurnOver = Sales/Average operating assets = 4070000/1850000= 2.2

ROI = Margin*Turnover = 16%*2.2= 35.2%

2

Net Operating Income                 651200

Min required return                     388500

Residual Income 262700

Note: Min required return = 1850000*21% = $388500