Question

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

Joel de Paris, Inc. Balance Sheet
	Beginning Balance		Ending Balance
Assets
Cash	$	136,000	$	126,000
Accounts receivable		343,000		477,000
Inventory		565,000		484,000
Plant and equipment, net		876,000		873,000
Investment in Buisson, S.A.		410,000		427,000
Land (undeveloped)		248,000		253,000
Total assets	$	2,578,000	$	2,640,000
Liabilities and Stockholders' Equity
Accounts payable	$	372,000	$	350,000
Long-term debt		1,004,000		1,004,000
Stockholders' equity		1,202,000		1,286,000
Total liabilities and stockholders' equity	$	2,578,000	$	2,640,000

Joel de Paris, Inc. Income Statement
Sales		$	5,432,000
Operating expenses			4,508,560
Net operating income			923,440
Interest and taxes:
Interest expense	$ 126,000
Tax expense	200,000		326,000
Net income		$	597,440

     The company paid dividends of $513,440 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 Turnover answer to 1 decimal place. Round your Margin and ROI percentage answers to 1 decimal place (i.e 0.123 should be entered as 12.3.))

        

2.	The board of directors of Joel de Paris, Inc., has set a minimum required rate of return of 17%. What was the company’s residual income last year?

Answer 1

Average operating assets for last year.

	Beginning Balances	Ending Balances
Cash	1,36,000	1,26,000
Accounts receivable	3,43,000	4,77,000
Inventory	5,65,000	4,84,000
Plant and equipment (net)	8,76,000	8,73,000
Total operating assets	19,20,000	19,60,000

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

= $19,40,000

1. Compute the company’s margin, turnover, and return on investment (ROI) for last year

Margin        = Net operating income / Sales

= ($923440 / $5432000)*100

                   = 17%

Turnover =Sales / Average operating assets

= $5432000 / $1940000

= 2.8

ROI = Margin × Turnover= 17% x 2.8 = 47.6%

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

Net operating income                        $9,23,440

Less : Minimum required return        $3,29,800

($1940000 x 17%)

Residual income                              $5,93,640