Question

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

Joel de Paris, Inc. Balance Sheet
	Beginning Balance		Ending Balance
Assets
Cash	$	137,000	$	132,000
Accounts receivable		337,000		475,000
Inventory		572,000		488,000
Plant and equipment, net		814,000		805,000
Investment in Buisson, S.A.		405,000		428,000
Land (undeveloped)		250,000		248,000
Total assets	$	2,515,000	$	2,576,000
Liabilities and Stockholders' Equity
Accounts payable	$	375,000	$	336,000
Long-term debt		1,018,000		1,018,000
Stockholders' equity		1,122,000		1,222,000
Total liabilities and stockholders' equity	$	2,515,000	$	2,576,000

Joel de Paris, Inc. Income Statement
Sales		$	4,512,000
Operating expenses			3,835,200
Net operating income			676,800
Interest and taxes:
Interest expense	$ 121,000
Tax expense	202,000		323,000
Net income		$	353,800

The company paid dividends of $253,800 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.)

       

2.	The board of directors of Joel de Paris, Inc., has set a minimum required rate of return of 14%. What was the company’s residual income last year?

Answer 1

1)	Margin = net operating income/sales
	Turnover = sales/average operating assets
	ROI          = margin * turnover
	Margin		15.0%
	turnover		2.40
	ROI		36.0%
	total operating assets don't include investments in other companies or in undeveloped
	land
					ending	Beginning
					balances	balances
	Cash				132,000	137,000
	account receivable				475,000	337,000
	inventory				488,000	572,000
	plant and equipment,net				805,000	814,000
	total Assets				1,900,000	1,860,000
	Average operating assets = ( ending balances + beginning balances )/2
				(1,900,000+1,860,000)/2
				1880000
2)	Net operating income				676,800
	minimum required return				14%
	residual income				413600
	Residual income =net operating income - (average operating assets *min required return)