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		348,000			471,000
Inventory		561,000			485,000
Plant and equipment, net		836,000			836,000
Investment in Buisson, S.A.		403,000			428,000
Land (undeveloped)		251,000			249,000
Total assets	$	2,534,000		$	2,597,000
Liabilities and Stockholders' Equity
Accounts payable	$	377,000		$	339,000
Long-term debt		1,024,000			1,024,000
Stockholders' equity		1,133,000			1,234,000
Total liabilities and stockholders' equity	$	2,534,000		$	2,597,000

Joel de Paris, Inc. Income Statement
Sales					$	5,320,000
Operating expenses						4,522,000
Net operating income						798,000
Interest and taxes:
Interest expense	$	117,000
Tax expense		198,000				315,000
Net income					$	483,000

The company paid dividends of $382,000 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?

Average operating assets Margin 1 2. Turnover ROI Residual income 3.

Comparative data on three companies in the same service industry are given below.

Required:

2. Fill in the missing information. (Round the "Turnover" and "ROI" answers to 2 decimal places.)

Answer 1

Answer:

1. Operating assets do not include investments in other companies or in undeveloped land:

	Beginning Balance	Ending Balance
Cash	$135,000	$128,000
Accounts Receivable	$ 348,000	$ 471,000
Inventory	$ 561,000	$ 485,000
Plant and Equipment (Net)	$ 836,000	$ 836,000
Total Operating Assets	$1,880,000	$1920,000

Average operating assets = ($1,880,000 + $1920,000)/2 = $1,900,000

2. Computation of Margin, turnover, ROI & Residual income

a) Margin = Net Operating Income/Sales = $798,000 / $5320,000 = 15%

b) Turnover = Sales / Average Operating Assets = $53,20,000 / $1,900,000 = 2.80

c) ROI = Margin x Turnover = 15% x 2.8 = 42%

d) The company minimum required return of 15%. therefore company residual income is below

Net Operating Income	$798,000
Minimum Required Return (15% x $1,900,000)	285,000
Residual Income	$513,000

3. Missing information of Company C:

a) Turnover = Sales / Average Operating Assets

Suppose Sales is X

2 = X / $ 2,890,000

X = $ 5,780,000

b) Margin = Net Operating Income/Sales

Suppose Net operating income = Y

4% = Y / $ 5,780,000

Y = $ 231,200

Company C :

a) Sales = $ 5,780,000

b) Net operating margin = $ 231,200