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

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

Explanation:

Computation of Gross profit

                                                $'000

Net Sales                                1,230

Cost of goods sold                 (520)

Gross Profit                              710  

88 because 4 plus 4 equals 8. 40 plus 40 equals 80. 80 plus 8 equals 88