Question

Problem 11-15 Return on Investment (ROI) and Residual Income [LO11-1. LO11-2] Financial data for Joel de Paris, Inc, for last year follow 1 de Paris, Inc Balance Sheet Ending Beginning Assets Cash Accounts receivable Inventory Plant and equipment, net Investment in Buisson, S.A Land (undeveloped) Total assets s 140,80012,000 456,808 328,880 688,600 258,800 188,080 530,000 380,800 620,980 288,888 170,908 $ 2,828,98032,100,8 Liabilities and Stockholders Equity Accounts payable Long-term debt Stockholders equity S360,8803S310,880 1,500,000 1,580,800 168,000 ::: m 290,aee Total liabilities and stockholders equity oei-de Paris, inc; Income Statement 4,858,080 Sales Operating expenses Net operating income Interest and: taxes: 405, 080 S 150,800 110,00e Interest expense Tax expense 268,090 $3145,000 Net income The company paid dividends of $15,000 last year The 'Investment in Buisson. SA. on the balance sheet represents an investment in the stock of another company The company's minimum required rate of return of 15% Required 2. Compute the company's margin, turnover and return on investment (ROn for last year. (Round Turnover" to 1 2 ompute the company s margin, turnovet and feum on rvestment Rop tor lestyear (Round Turnover" to 1 decimal place) 3. What was the company's residual income last year?

Answer 1

Average operating assets = [(2,020,000-180,000-250,000)+(2,100,000-170,000-280,000)]/2 = 1,620,000
Margin = Net operating income / sales =)405, 000/4,050,000 = 10%
Turnover = Sales / Average operating assets = 4,050,000/1,620,000 = 2.5
ROI = margin * turnover =10*2.5 = 25%
Residual income = Net operating income - required return = 405,000 - (1,620,000*15%). = 162,000