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. Joel de Paris, Inc. Balance Sheet Beginning Balance Ending Balance Assets Cash Accounts receivable Inventory Plant and equipment, net Investment in Buisson, S.A. Land (undeveloped) Total assets Liabilities and Stockholders' Equity Accounts payable Long-term debt Stockholders' equity Total liabilities and stockholders' equity 335, eee 568, eee 865.000 406, eee 250, eee 2,556,000 $ 129,080 476,000 477.eee 858.000 434,eee 255, eee $ 2,629,eee 373,000 ,eei, eee 182,000 556.000 348,eee 1.001.ee 1,280,00 $ 2,629,00 Joel de Paris, Inc. Income Statement Sales Operating expenses Net operating income Interest and taxes: Interest expense $ 125,000 Tax expense 194,000 Net income $ 4,416,000 3,665, 280 750, 720 319.000 431,720 The company paid dividends of $333,720 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% < Prev 1 of 1 18 Score answer >

Answer 1

(1)

Statement showing computation of Total Operating Assets

Assets	Beginning balance	Ending Balance
Cash	132000	129000
Accounts Receivable	335000	476000
Inventory	568000	477000
Plant & Equipment- Net	865000	858000
Total Operating Assets	$1900000	$1940000

(Note: Investments in another company and Undeveloped land is not part of Operating assets)

Company's Average operating assets for last year = (Ending balance + Beginning balance) / 2
=> (1940000 + 1900000) / 2
=> $1920000 (Ans)

(2)

Company's Margin for last year = (Net operating Income / Sales)
=> (750720 / 4416000)
=> 17% (Ans)

Company's Turnover for last year = ( Sales / Average Operating Assets)
=> (4416000 / 1920000)
=> 2.3 (Ans)

Company's Return on Investment for last year = (Company's Margin X Company's Turnover)
=> 17% X 2.3
=> 39.10% (Ans)

(3)

To calculate company's Residual Income Last year, We need MINIMUM REQUIRED RETURN
where, Minimum Required return = (Given percentage of minimum required return) X Average operating Assets
=> 15% X 1920000
=> $288000

So, Company's Residual Income Last Year = (Net Operating Income - Minimum required Return)
=> $750720 - $288000
=> $462720 (Ans)