Financial data for Joel de Paris, Inc., for last year follow: The company paid d

Question

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

The company paid dividends of $216,340 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?

Joel de Paris, Inc.
Balance Sheet Beginning
Balance Ending
Balance Assets Cash $ 127,000 $ 133,000 Accounts receivable 340,000 483,000 Inventory 565,000 480,000 Plant and equipment, net 878,000 854,000 Investment in Buisson, S.A. 398,000 434,000 Land (undeveloped) 254,000 251,000 Total assets $ 2,562,000 $ 2,635,000 Liabilities and Stockholders' Equity Accounts payable $ 385,000 $ 347,000 Long-term debt 972,000 972,000 Stockholders' equity 1,205,000 1,316,000 Total liabilities and stockholders' equity $ 2,562,000 $ 2,635,000

Explanation / Answer

SOLUTION

1. Operating assets = Total assets - Investments - Land

Average operating assets = (Beginning operating assets + Ending operating assets) / 2

= ($1,910,000 + $1,950,000)/2

= $3,860,000/2 = $1,930,000

2. Margin = Net operating income / sales

= $652,340/ $5,018,000

= 13%

Turnover = Sales/ Average operating assets

= $5,018,000 / $1,930,000

= 2.6

ROI = Margin * Turnover

= 13% * 2.6

= 33.8%

3. Residual Income= Net operating income - Minimum required return on average operating assets

=$652,340 - (15% * $1,930,000)

=$652,340 -$289,500

= $362,840

Particulars Beginning ($) Ending ($) Total assets 2,562,000 2,635,000 Less:Investments (398,000) (434,000) Less:Land (254,000) (251,000) Operating assets 1,910,000 1,950,000

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