Problem 11-15 Return on Investment (ROI) and Residual Income [LO11-1, LO11-2] Th
ID: 2454046 • Letter: P
Question
Problem 11-15 Return on Investment (ROI) and Residual Income [LO11-1, LO11-2]
The company paid dividends of $231,400 last year. The “Investment in Buisson, S.A.,” on the balance sheet represents an investment in the stock of another company.
Compute the company’s margin, turnover, and return on investment (ROI) for last year. (Round your answers to 2 decimal places.)
The board of directors of Joel de Paris, Inc., has set a minimum required rate of return of 18%. What was the company’s residual income last year?
Financial data for Joel de Paris, Inc., for last year follow:
Explanation / Answer
Sale Margin means surplus of the sales value over all the business expenditure. Therefore It can be calculated by subtracting the operating expenses form the sales revenue. Sales Margin = Sales Value-All expenses Therefore Sales Margin =Net Income = 3,28,400/- (39,90,000-3351600-1,11,000-1,99,000) . Sales margin % (3,28,400/39,90,000*100)= 8.23 % Turnover:- Turnover = Sales Revenue/Avg. investment in the business Sales Revenue = 39,90,000 Average investment in the business= (Opening investment +Closing investment)/2 Opening Investment Stockholders Equity at Opening 11,75,000.00 Less: Investment in Buisson SA 4,03,000.00 7,72,000.00 Closing Investment Stockholders Equity at closing 12,72,000.00 Less: Investment in Buissioin SA 4,27,000.00 8,45,000.00 Avg Inv In Business = (7,72,000+8,45,000/2) 8,08,500.00 Turnover 4.94 Return on Investment Sales Margin*Turnover Return on Investment (8.23*4.94) 40.62 % 2) Residual Income = Actual Income-Minimum required income Minimum required income = Avg of the Assets*18% 808500*18% 1,45,530 Residual Income = 328400-145530 1,82,870