Question

oel de Paris, Inc., for last year follow: Joel de Paris, Inc. Balance Sheet Beginning Balance Ending Balance Assets Cash $ 137,000 $ 126,000 Accounts receivable 337,000 486,000 Inventory 565,000 481,000 Plant and equipment, net 881,000 867,000 Investment in Buisson, S.A. 390,000 431,000 Land (undeveloped) 246,000 252,000 Total assets $ 2,556,000 $ 2,643,000 Liabilities and Stockholders' Equity Accounts payable $ 370,000 $ 336,000 Long-term debt 987,000 987,000 Stockholders' equity 1,199,000 1,320,000 Total liabilities and stockholders' equity $ 2,556,000 $ 2,643,000 Joel de Paris, Inc. Income Statement Sales $ 4,850,000 Operating expenses 4,219,500 Net operating income 630,500 Interest and taxes: Interest expense $ 120,000 Tax expense 196,000 316,000 Net income $ 314,500 The company paid dividends of $193,500 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 = 2556000-390000-246000= $1920000

Ending operating assets = 2643000-431000-252000= $1960000

Average operating assets = (1920000+1960000)/2 = $1940000

2

Margin = Net operating income/Sales = 630500/4850000= 13%

Turnover = Sales/Average operating assets = 4850000/1940000= 2.5

ROI = Margin*Turnover = 13%*2.5= 32.5%

3

Residual income = Net operating income-Minimum return required

Residual income = 630500-(1940000*15%)= $339500