Question

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

Joel de Paris, Inc.
Balance Sheet
Beginning Ending
Balance Balance
Assets
Cash . 140,000 120,000
Accounts receivable . 450,000 530,000
Inventory . 320,000 380,000
Plant and equipment, net . 680,000 620,000
Investment in Buisson, SA . 250,000 280,000
Land (undeveloped) . 180,000 170,000
Total assets . 2,020,000 2,100,000
Joel de Paris, Inc.
Income Statement
Sales .
Operating expenses .
Net operating income .
Interest and taxes:
Interest expense .
Tax expense .
Net income : .
$4,050,000
3,645,000
405,000
$150,000
110,000 260,000
$ 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.
Required:
l. Compute the company's margin, turnover, and return on investment (ROI) for last year.
2. The board of directors of Joel de Paris, Inc., has set a minimum required rate of return of 15%. What was the company's residual income last year?

Answer 1

Operating profit margin = operating profits ÷ turnover

= 405000 ÷ 4,050,000

= 0.1 = 10%

ROI = Net operating Income/ Average Operating assets

= 405,000 ÷ 1620,000

= 0.25 = 25%

(note: Average operating assets = ( opening operating assets + closing operating assets ) ÷ 2 )

Turnover = sales/ average operating assets

= 4,050,000/ 1620,000

= 2.5

Residual income

minimum required return = minimum required rate of return × average operating assets

= 15% × 1620000

= 243000

Residual income = net operating income - minimum required return

= 162000