Question

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

Joel de Paris, Inc. Balance Sheet
	Beginning Balance			Ending Balance
Assets
Cash	$	138,000		$	130,000
Accounts receivable		350,000			482,000
Inventory		578,000			483,000
Plant and equipment, net		794,000			805,000
Investment in Buisson, S.A.		407,000			429,000
Land (undeveloped)		250,000			250,000
Total assets	$	2,517,000		$	2,579,000
Liabilities and Stockholders' Equity
Accounts payable	$	383,000		$	340,000
Long-term debt		1,009,000			1,009,000
Stockholders' equity		1,125,000			1,230,000
Total liabilities and stockholders' equity	$	2,517,000		$	2,579,000

Joel de Paris, Inc. Income Statement
Sales					$	4,512,000
Operating expenses						3,880,320
Net operating income						631,680
Interest and taxes:
Interest expense	$	116,000
Tax expense		191,000				307,000
Net income					$	324,680

The company paid dividends of $219,680 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 return on investment (ROI) for last year. (Round "ROI" to 2 decimal places.)

1.	Average operating assets	$1,880,000
2.	Margin	14.00	%
	Turnover	2.40
	ROI	???	%
3.	Residual income	$349,680

Answer 1

a)

1.company's margin = Net operating income/ sales

=$631,680/$4,512,000

=14%

2.Turnover = sales/average operating assets

operating assets doesnot includes investment in other company or underdeveloped land

Beginning operating asset = $2,517,000-$250,000-407,000

=$1,860,000

Ending Operating assets = $2,579,000-$250,000-429,000

=$1,900,000

Average operating assets = beginning assets+ending assets)/2

($1,860,000+1,900,000)/2

=$1,880,000

Turnover = $4,512,000/1,880,000

2.4 times

3. ROI = MarginXTurnover

=14%*2.4

=33.6%

b)

Residual income =Net operating income-minimum required return

Minimum required return = (Average operating assets*required return)

=$631,680 - ($1,880,000*15%)

=$631,680-$282,000

=$349,680

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