Problem 9-15A Return on Investment (ROI) and Residual Income [LO9-1, LO9-2] The

Question

Problem 9-15A Return on Investment (ROI) and Residual Income [LO9-1, LO9-2]

     The company paid dividends of $418,900 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 Turnover answer to 1 decimal place. Round your Margin and ROI percentage answers to 1 decimal place (i.e 0.123 should be entered as 12.3.))

The board of directors of Joel de Paris, Inc., has set a minimum required rate of return of 16%. What was the company’s residual income last year?

Explanation / Answer

Answer:

1 Company Margin = Net Income / Net Sales

Company Margin = $533900 / $5070000

Company Margin = 10.5%

Turnover Ratio = Sales / Average Inventory

Average Inventory =(Opening Inventory + closing Inventory) / 2

Avg Inventory = ($561000 + $474000)/2

Avg Inventory = $517500

Turnover Ratio = $5070000 / $517500

Turnover Ratio = 9.80 times

ROI = Net Income / Total Investment

ROI = $533900 / $426000

ROI = 125.33%

2 Company’s Residual Income = Net operating income – (Minimum required return * cost of operating assets)

Cost of Operating Assets = Account Receivables + Inventory + Plant & Equipment

Cost of Operating assets = $480000 + $474000 + $891000

Cost of Operating assets = $1845000

Hence, Company’s Residual Income = $861900 – (16% * $1845000)

Company’s Residual Income = $861900 - $295200

Company’s Residual Income = $566700.

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