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	$	140,000
Accounts receivable		330,000		478,000
Inventory		572,000		472,000
Plant and equipment, net		853,000		840,000
Investment in Buisson, S.A.		394,000		430,000
Land (undeveloped)		250,000		249,000
Total assets	$	2,534,000	$	2,609,000
Liabilities and Stockholders' Equity
Accounts payable	$	375,000	$	343,000
Long-term debt		1,049,000		1,049,000
Stockholders' equity		1,110,000		1,217,000
Total liabilities and stockholders' equity	$	2,534,000	$	2,609,000

   

Joel de Paris, Inc. Income Statement
Sales		$	4,775,000
Operating expenses			3,915,500
Net operating income			859,500
Interest and taxes:
Interest expense	114,000
Tax expense	197,000		311,000
Net income		$	548,500

The company paid dividends of $441,500 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 1 decimal place.)

Margin		%
Turnover		times
ROI		%

2. The board of directors of Joel de Paris, Inc., has set a minimum required rate of return of 15%. What was the company’s residual income last year?

Net operating income
Minimum required return
Residual income	$0

Answer 1

Margin :-

= Net operating income / sales

=859,500/4,775,000

= 18%

Turnover :-

= Sales/ Average operating assets

=4,775,000/1,910,000

=2.5 times

ROI :-

= Net operating income / Average operating assets

= 859,500/1,910,000

= 45%

Net operating income ......... 859,500

Minimum required returns......(286,500) [1,910,000 x 15%]

Residual Income................. = $573,000

Calculation of Average operating assets:-

{(Beginning total assets - beginning land - beginning investment) +

(Ending total assets - ending land - ending investment)} / 2

={(2,534,000-394000-250000) + (2,609,000-430,000-249,000)}/2

=(1890000+1930000)/2

=$1,910,000

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