Question

Shown below are selected data from the financial statements of the Supreme Company. (Dollar amounts are in millions, except for the per share data).

Income statement data:

$'000
Net sales $1,230
Cost of goods sold $520
Operating expenses $440
Net income $390
Balance sheet data:

$'000
Average total equity $2,400
Average total assets $4,000
Supreme reported earnings per share for the year of $4 and paid cash dividends of $1 per share.

At year-end, the Wall Street Journal listed Supreme's capital stock as trading at $88 per share.

Required:

Compute the following:

a). Gross profit rate

b). Supreme's operating income (in millions)

c). Return on assets

d). Return on equity

e). Price-earning ratio

Answer 1

a. Gross profit rate = Gross profit / sales

= $710,000 * 100

$1,230,000

= 57.72%

b. Supreme Operating Income

Gross Profit $710,000

Operating expenses (440,000)

Operating Profit 270,000

c. Return on Asset = Return/ Average Asset

= $390,000 * 100

$4,000,000

= 9.75%

d. Return on equity = Return / Average equity

= $390,000 * 100

$2,400,000

= 16.25%

e. Price-earnings ratio = Market price per share / earnings per share

= $88/ $4

= 22

Step-by-step explanation:

Computation of Gross profit

$'000

Net Sales 1,230

Cost of goods sold (520)

Gross Profit 710