Problem 11-15 Return on Investment (ROI) and Residual Income [LO11-1, LO11-2) Fi
ID: 2570603 • Letter: P
Question
Problem 11-15 Return on Investment (ROI) and Residual Income [LO11-1, LO11-2) Financial data for Joel de Paris, Inc. .for last year follow Joel de Paris, Inc. Balance Sheet Beginning Ending Balance Balance Assets Cash Accounts receivable Inventory Plant and equipment, net Investment in Buisson, S.A Land (undeveloped) Total assets s 136,000 126,000 486,000 572,000 487,000 861,000 391,000 431,000 253,000255,000 342,000 870,000 $2,564,000 $2,646,000 Liabilities and Stockholders' Equity Accounts payable Long-term debt Stockholders' equity Total liabilities and stockholders' equity $389,000 $ 349,000 1,000,000 1,000,000 1,175,000 1,297,000 $2, 646,000 $2,564,000 Joel de Paris, Inc Income Statement Sale Operating expensea Net operating income Interest and taxea: $5,044,000 4,287,400 756, 600 Interest expense Tax expense $125, 000 320,000 436, 00 195,000 Net income The company paid dividends of $314,600 last year. The "Investment in Buisson SA on the balance sheet represents an investment in the stock of another company. The company's minimum required rate of return of 15 Required: L Compute the company's average operating assets for last year. 2. Compute the company's margin, turnover, and return on investment R decimal ploces.) 3. What was the company's residual income last year? for last year. Round-Margin. Turnover" and-Ror to 2 Tunover Resdual incomeExplanation / Answer
1. Computation of company's average operating asset for last year:
The assets normally included in the calculation of average operating assets are cash, prepaid expenses, accounts receivable, inventory, and fixed assets. It does not take in to account investment in other companies and undeveloped land since it does not contribute in company's operating activities.
(In $)
Asset Beginning Balance Ending Balance
Cash 136000 126000
Accounts Receivable 342000 486000
Inventory 572000 487000
Plant & Machinery (net) 870000 861000
Total Asset 1920000 1960000
Average operating asset = $(1920000+1960000)/2 = $19,40,000
2. Computation of margin, turnover and ROI
Margin would be computed as profit margin of sales = Net Operating Income/ Sales
= $756,600/ 50,44,000 = 0.15 or 15%
Turnover ratio or Asset Turnover ratio = Sales / Average Operating Asset = 50,44,000/ 19,40,000(computed above) = 2.6
Return on Investment (ROI) = Margin * Turnover = 15 * 2.6 = 39%
3. Residual Income = The formula for calculating residual income is to multiply average operating assets by the cost of capital (required return), and then subtract this value from operating income.
Net Oeprating Income (A) = $756,600
Minimum required return (B) =$291,000 (15%(given) of 19,40,000)
Residual income (A-B) = $465,600
Kindly let me know if you need any clarifications