Question

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

Joel de Paris, Inc. Balance Sheet
	Beginning Balance			Ending Balance
Assets
Cash	$	134,000		$	140,000
Accounts receivable		347,000			485,000
Inventory		580,000			475,000
Plant and equipment, net		819,000			820,000
Investment in Buisson, S.A.		396,000			426,000
Land (undeveloped)		249,000			248,000
Total assets	$	2,525,000		$	2,594,000
Liabilities and Stockholders' Equity
Accounts payable	$	378,000		$	346,000
Long-term debt		965,000			965,000
Stockholders' equity		1,182,000			1,283,000
Total liabilities and stockholders' equity	$	2,525,000		$	2,594,000

Joel de Paris, Inc. Income Statement
Sales					$	4,750,000
Operating expenses						4,085,000
Net operating income						665,000
Interest and taxes:
Interest expense	$	114,000
Tax expense		196,000				310,000
Net income					$	355,000

The company paid dividends of $254,000 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. Company's Average Operating Assets =

= Total Begining Operating Assets + Total Ending Operating Assets

_________________________________________________________

2

= Beg (Cash+Accounts Receivable+Inevntory+P&E) + End (Cash+Accounts Receivable+Inevntory+P&E)

_______________________________________________________________________________________

2

= Beg (134,000+347,000+580,000+819,000) + End (140,000+485,000+475,000+820,000)

____________________________________________________________________________

2

= Beg (1,880,000) + End (1,920,000)

________________________________

2

= 3,800,000

___________

2

= 1,900,000 Average Operating Assets

2. Company's margin =

= Net operating Income

____________________ x 100

Sales

= 355,000

____________ x 100

4,750,000

= 7.5 Margin

3. Asset Turnover (Complete Information not given)

= Sales

____________ x 100

Average Total Assets

= 4750000

____________ x 100

(2525000+2594000) / 2

= 4,750,000

_____________ x 100

2,559,500

= 185.5

4. Return on Investment

= Net Profit

____________ x 100

Cost of Investment

= (426,000 - 396,000)

____________________ x 100

396,000

= 7.58 ROI

5. Company's Residual Income

= Net Operating Income - (Min Required Return x Cost of Operating Assets)

= 655,000 - (15% x 3,800,000)

= 655,000 - 570,000

= 85000 Residual Income