PROBLEM 11-15 Return on Investment (RoI) and Residual Income LO11-1 Financial da

Question

PROBLEM 11-15 Return on Investment (RoI) and Residual Income LO11-1 Financial data for Joel de Paris, Inc, for last year follow L011-2 Joel de Paris, Inc. Balance Sheet Beginning Ending Balance Balance Assets Cash Accounts receivable Inventory Piant and equipment, net Investment in Buisson, SA Land (undeveloped) Total assets Liabilities and Stockholders Equity Accounts payable Long-term debt Stockholders equity Total liabilities and stockholders' equity S 140,000 S 120,000 450,000 530,000 320,000 380,000 680,000 620,000 250,000 280,000 80,000170,000 $2,020,000 $2,100,000 S 360,000 S 310,000 1,500,000 1500,000 160,000 290,000 $2,100,000 $2,020,000 Joel de Paris, Inc. Income Statement Sales Operating expenses Net operating income Interest and taxes $4,050,000 3,645,000 405,000 $150,000 Interest expense Tax expense Net income $ 145,000 The company paid dividends of $15,000 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 (ROT for last year. (Hint Should you use net income or net operating income in your calculations) What was the company's residual income last year?

Explanation / Answer

1 Beginning operating assets = 2020000-250000-180000=$1590000 Ending operating assets = 2100000-280000-170000= $1650000 Average operating assets=(1590000+1650000)/2 = $1620000 2 Margin = Net operating income/Sales = 405000/4050000 = 10% Turnover = Sales/Average operating assets=4050000/1620000= 2.5 ROI = Margin*Turnover = 10%*2.5 = 25% 3 Residual income=405000-(1620000*15%)= $162000

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