Question

Financial data for Joel de Paris, Inc., for last year follow: Joel de Paris, Inc. Balance Sheet Beginning Balance Ending Balance Assets Cash $ 135,000 $ 128,000 Accounts receivable 342,000 479,000 Inventory 574,000 474,000 Plant and equipment, net 779,000 789,000 Investment in Buisson, S.A. 392,000 430,000 Land (undeveloped) 248,000 249,000 Total assets $ 2,470,000 $ 2,549,000 Liabilities and Stockholders' Equity Accounts payable $ 376,000 $ 346,000 Long-term debt 952,000 952,000 Stockholders' equity 1,142,000 1,251,000 Total liabilities and stockholders' equity $ 2,470,000 $ 2,549,000 Joel de Paris, Inc. Income Statement Sales $ 4,995,000 Operating expenses 4,295,700 Net operating income 699,300 Interest and taxes: Interest expense $ 129,000 Tax expense 198,000 327,000 Net income $ 372,300 The company paid dividends of $263,300 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

Ans.	Assets	Beginning balance	Ending balance
	Cash	$135,000	$128,000
	Accounts receivables	$342,000	$479,000
	Inventory	$574,000	$474,000
	Plant and equipment	$779,000	$789,000
	Total operating assets	$1,830,000	$1,870,000
	*Undeveloped land and investment is other company are not included in operating assets.
Ans.1	Average operating assets = (Beginning operating assets+Ending operating assets)/2
		($1,830,000 + $1,870,000) / 2
		$3,700,000 / 2
		$1,850,000
Ans.2 a	Margin =   Net operating income / Sales * 100
		$699,300 / 4,995,000 *100
		14%
Ans.2 b	Turnover = Sales / Average operating assets
		4,995,000 / $1,850,000
		2.7	times
Ans. 2 c	Return on investment =   Margin * Turnover
		0.14 * 2.7
		0.378	or 37.8%
Ans.3	Residual income =   Net operating income - (Average operating assets * Minimum required return)
		$699,300   -   ($1,850,000 * 0.15)
		$699,300   -   $277,500
		$421,800