Question

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 139,000 344,000 578,000 859,000 391,000 248,000 $ 2,559,000 $ 137,000 489,000 474,000 860,000 427,000 250,000 $ 2,637,000 $ 377,000 1,047,000 1,135,000 $ 2,559,000 $ 350,000 1,047,000 1,240,000 $2,637,000 Joel de Paris, Inc. Income Statement Sales Operating expenses Net operating income Interest and taxes: Interest expense $ 121,000 Tax expense 195,000 Net income $ 4,462,000 3,837,320 624,680 316,000 308,680 $ The company paid dividends of $203,680 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%.

Answer 1

Average operating assets = [(2,559,000-248,000-391,000)+(2,637,000-250,000-427,000)]/2 = 1,940,000
Margin = Net operating income /Sales = 624,680/4,462,000 = 14% Turnover = Sales/Average operating assets = 4,462,000/1,940,000 = 2.3 Roi = Margin * Turnover = 14 * 2.3 = 32.20%
Residual income = Net operating income - Required return = 624,680 - (1,940,000*15%) = 333,680

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