Question

Joel de Paris, Ing. 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 138, 339. see 569, eee 814.ee 393. aa 246, see $ 2,499, eee 137., eee 473.800 475,888 B15, eee 425, eee 246, eee $ 2,571, eee $ 377.ee 1,029,00 1,893, eee $ 2,499, eee $ 336, eee 1,929.000 1,206, eee $ 2,571, eee Joel de Paris, Inc. Income Statement Sales Operating expenses Net operating income Interest and taxes Interest expense $ 138, see Fax expense 192.eee $ 5,876, see 4,365,368 718, 640 322, eee 388,640 Net income The company paid dividends of $275,640 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? Average operating as Margin Turnover RO Residual income

Answer 1

Solution: 1 Operating assets do not include investments in other companies or in undeveloped land Beginning Ending Balances Balances Cash $ 138,000 $ 137,000 Accounts receivable $ 339,000 $ 473,000 Inventory $ 569,000 $475,000 Plant and equipment (net) $814,000 $ 815,000 Total operating assets $ 1,860,000 $1,900,000 Average operating assets = ($1,860,000+ $1,900,000)/2 = $1,880,000 Average operating assets = $1,880,000 2 Margin = Net operating income / sales Margin = $710,640 / $5,076,000 Margin = 14% Turnover = Sales / Average operating assets Turnover = $5,076,000 / $1,880,000 Turnover = 2.70 ROI = Margin x Turnover ROI = 14% x 2.70 ROI = 38% 3 Calculation of Residual income Net operating income Less: Minimum required return * Residual income $710,640 $282,000 $428,640 * Minimum requirede return = company's required rate of return x Average operating assets Minimum requirede return = 15% $1,880,000 Minimum requirede return = $282,000