Question

Question 2 ch 12

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

Joel de Paris, Inc. Balance Sheet
	Beginning Balance		Ending Balance
Assets
Cash	$	127,000	$	133,000
Accounts receivable		343,000		480,000
Inventory		578,000		486,000
Plant and equipment, net		792,000		781,000
Investment in Buisson, S.A.		402,000		429,000
Land (undeveloped)		247,000		250,000
Total assets	$	2,489,000	$	2,559,000
Liabilities and Stockholders' Equity
Accounts payable	$	374,000	$	339,000
Long-term debt		950,000		950,000
Stockholders' equity		1,165,000		1,270,000
Total liabilities and stockholders' equity	$	2,489,000	$	2,559,000

   

Joel de Paris, Inc. Income Statement
Sales		$	4,278,000
Operating expenses			3,593,520
Net operating income			684,480
Interest and taxes:
Interest expense	120,000
Tax expense	206,000		326,000
Net income		$	358,480

The company paid dividends of $253,480 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 1 decimal place.)

2. The board of directors of Joel de Paris, Inc., has set a minimum required rate of return of 15%. What was the company’s residual income last year?

Answer 1

Beginning operating assets = 2489000-402000-247000= $1840000

Ending operating assets = 2559000-429000-250000= $1880000

Average operating assets =(1840000+1880000)/2= $1860000

1

Margin = Net operating income/Sales = 684480/4278000= 16%

Turnover = Sales/Average operating assets = 4278000/1860000= 2.3

ROI = Margin*Turnover = 16%*2.3= 36.8%

2

Residual income = Net operating income-Minimum required return

Residual income = 684480-(1860000*15%)= $405480