Question

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

Joel de Paris, Inc. Balance Sheet
	Beginning Balance			Ending Balance
Assets
Cash	$	134,000		$	134,000
Accounts receivable		342,000			489,000
Inventory		576,000			472,000
Plant and equipment, net		808,000			805,000
Investment in Buisson, S.A.		404,000			429,000
Land (undeveloped)		252,000			248,000
Total assets	$	2,516,000		$	2,577,000
Liabilities and Stockholders' Equity
Accounts payable	$	373,000		$	348,000
Long-term debt		998,000			998,000
Stockholders' equity		1,145,000			1,231,000
Total liabilities and stockholders' equity	$	2,516,000		$	2,577,000

Joel de Paris, Inc. Income Statement
Sales					$	4,324,000
Operating expenses						3,632,160
Net operating income						691,840
Interest and taxes:
Interest expense	$	126,000
Tax expense		195,000				321,000
Net income					$	370,840

The company paid dividends of $284,840 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?

Answer 1

Average operating assets

= [(2,516,000-252,000-404,000)+(2,577,000-248,000-429,000)]/2

= 1,880,000

.

Margin = Net operating income/Sales = 691,840/4,324,000

= 16%

.

Turnover = Sales/Average operating assets = 4,324,000/1,880,000

= 2.3

.

ROI = Margin * Turnover = 16*2.3

= 36.8%

.

Residual income = Net operating income - required return

= 691,840 - (1,880,000*15%)

= 409,840