Question

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

Joel de Paris, Inc. Balance Sheet
	Beginning Balance		Ending Balance
Assets
Cash	$	130,000	$	132,000
Accounts receivable		336,000		476,000
Inventory		561,000		475,000
Plant and equipment, net		893,000		877,000
Investment in Buisson, S.A.		394,000		432,000
Land (undeveloped)		250,000		248,000
Total assets	$	2,564,000	$	2,640,000
Liabilities and Stockholders' Equity
Accounts payable	$	383,000	$	338,000
Long-term debt		1,039,000		1,039,000
Stockholders' equity		1,142,000		1,263,000
Total liabilities and stockholders' equity	$	2,564,000	$	2,640,000

Joel de Paris, Inc. Income Statement
Sales		$	4,268,000
Operating expenses			3,542,440
Net operating income			725,560
Interest and taxes:
Interest expense	$ 125,000
Tax expense	198,000		323,000
Net income		$	402,560

     The company paid dividends of $281,560 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 2 decimal places.)
	Margin Turnover ROI

2.	The board of directors of Joel de Paris, Inc., has set a minimum required rate of return of 21%. What was the company’s residual income last year?
	Net operating income Minimum required return Residual income

       

Answer 1

Beginning operating assets=2564000-394000-250000= $1920000
Ending operating assets=2640000-432000-248000= $1960000
Average operating assets=(1920000+1960000)/2= $1940000
1
Margin= Net operating income/Sales=725560/4268000= 17%
Turnover=Sales/Average operating assets=4268000/1940000= 2.2
ROI = Margin*Turnover = 17%*2.2 = 37.4%
2
Net operating income	725560
Minimum required return	407400	=1940000*21%
Residual income	318160