Question

Financial data for Joel de Paris, Inc., for last year follow: Joel de Paris, Inc. Balance Sheet Beginning Balance Ending Balance Assets Cash $ 127,000 $ 135,000 Accounts receivable 334,000 485,000 Inventory 562,000 490,000 Plant and equipment, net 827,000 780,000 Investment in Buisson, S.A. 407,000 428,000 Land (undeveloped) 245,000 252,000 Total assets $ 2,502,000 $ 2,570,000 Liabilities and Stockholders' Equity Accounts payable $ 386,000 $ 341,000 Long-term debt 1,024,000 1,024,000 Stockholders' equity 1,092,000 1,205,000 Total liabilities and stockholders' equity $ 2,502,000 $ 2,570,000 Joel de Paris, Inc. Income Statement Sales $ 4,114,000 Operating expenses 3,579,180 Net operating income 534,820 Interest and taxes: Interest expense $ 122,000 Tax expense 203,000 325,000 Net income $ 209,820 The company paid dividends of $96,820 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

See Explanation.

Step-by-step explanation:

1.

Lets compute the average operating assets first.

Avg Operating assets

= Opening Operating Assets + Closing Operating assets / 2

We assume that Investment in Buisson and undeveloped land did not contribute in operating income and thus are omitted from our calculations.

Opening Operating Assets = 127000+334000+562000+827000=$1,850,000

Closing Operating Assets=135000+485000+490000+780000=$1,890,000

Avg operating assets = 1850000 + 1890000 / 2 = $1,870,000

2.

Margin = Net operating Income / Total Turnover

Margin = 534,820 / 4,114,000 = 0.13 or 13%

Turnover on assets = Sales / Average operating assets

Turnover on assets = 4,114,000 / 1,870,000 = 2.2

ROI = NP after Interest and Tax / Avg Total investment

Avg total investment = (Op+Cl/2)

ROI = 209,820 / (2502,000+2570,000/2) = 0.0827 or 8.27%

3.

Residual Income = Net income - ( Minimum ROR * Common equity value)

For Common equity value we take the closing value.

Residual Income = 209,820 - (0.15 * 1,205,000)

Residual Income = 209820 - 180750 = $29,070

Note: Sometimes there are slight variations in formula elements used for calculation.

Hope that helps.