Question

Financial data for Joel de Paris, Inc., for last year follow: Joel de Paris, Inc. Balance Sheet Beginning Balance Ending Balance Assets Cash $ 128,000 $ 128,000 Accounts receivable 333,000 490,000 Inventory 579,000 475,000 Plant and equipment, net 870,000 857,000 Investment in Buisson, S.A. 410,000 432,000 Land (undeveloped) 249,000 246,000 Total assets $ 2,569,000 $ 2,628,000 Liabilities and Stockholders' Equity Accounts payable $ 371,000 $ 337,000 Long-term debt 981,000 981,000 Stockholders' equity 1,217,000 1,310,000 Total liabilities and stockholders' equity $ 2,569,000 $ 2,628,000

Joel de Paris, Inc. Income Statement Sales $ 5,211,000 Operating expenses 4,481,460 Net operating income 729,540 Interest and taxes: Interest expense $ 115,000 Tax expense 201,000 316,000 Net income $ 413,540

The company paid dividends of $320,540 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

Solution:

Given that the following information about

Financial data for Joel de Paris, Inc., for last year follow: Joel de Paris, Inc. Balance Sheet Beginning Balance Ending Balance Assets Cash $ 128,000 $ 128,000 Accounts receivable 333,000 490,000 Inventory 579,000 475,000 Plant and equipment, net 870,000 857,000 Investment in Buisson, S.A. 410,000 432,000 Land (undeveloped) 249,000 246,000 Total assets $ 2,569,000 $ 2,628,000 Liabilities and Stockholders' Equity Accounts payable $ 371,000 $ 337,000 Long-term debt 981,000 981,000 Stockholders' equity 1,217,000 1,310,000 Total liabilities and stockholders' equity $ 2,569,000 $ 2,628,000

Joel de Paris, Inc. Income Statement Sales $ 5,211,000 Operating expenses 4,481,460 Net operating income 729,540 Interest and taxes: Interest expense $ 115,000 Tax expense 201,000 316,000 Net income $ 413,540

The company paid dividends of $320,540 last year.

The company's minimum required rate of return of 15%.

1.
Beginning operating assets      ($2,569,000-$410,000-$249,000)		$1,910,000
Ending operating assets           ($2,628,000-$432,000-$246,000)		$1,950,000
Average operating assets              ($1,910,000+$1,950,000)/2		$1,930,000
2.
Margin = Net operating income/Sales       $729,540/$5,211,000		14%
Turnover = Sales/Average operating assets $5,211,000/$1,930,000		2.7
ROI=Margin*Turnover	14%*2.7	37.8%
3.
Residual income                               $729,540-($1,930,000*15%)		$440,040