Question

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

Joel de Paris, Inc. Balance Sheet
	Beginning Balance			Ending Balance
Assets
Cash	$	129,000		$	132,000
Accounts receivable		340,000			479,000
Inventory		577,000			476,000
Plant and equipment, net		794,000			793,000
Investment in Buisson, S.A.		401,000			427,000
Land (undeveloped)		255,000			249,000
Total assets	$	2,496,000		$	2,556,000
Liabilities and Stockholders' Equity
Accounts payable	$	389,000		$	344,000
Long-term debt		971,000			971,000
Stockholders' equity		1,136,000			1,241,000
Total liabilities and stockholders' equity	$	2,496,000		$	2,556,000

Joel de Paris, Inc. Income Statement
Sales					$	3,906,000
Operating expenses						3,359,160
Net operating income						546,840
Interest and taxes:
Interest expense	$	115,000
Tax expense		194,000				309,000
Net income					$	237,840

The company paid dividends of $132,840 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?

11. 14.00% Average operating assets Margin Turnover ROI 3. Residual income

Answer 1

Average operating assets = [(2,496,000-255,000-401,000)+(2,556,000-249,000-427,000)]/2 = 1,860,000
Margin = Net operating income/Sales = 546,840/3,906,000 = 14% Turnover = Sales/Average operating assets = 3,906,000/1,860,000 = 2.1 ROI = Margin * turnover = 14*2.1 = 29.4%
Residual income = Net operating income - required return = 546,840 - (1,860,000*15%) = 267,840