Question

Comparative data for the “I Told You So Company” for the two-year period 2017-2018 are presented below.

Income Statement Data
	2018	2017
Net Sales	$1,500,000	$1,200,000
Cost of Goods Sold	934,000	741,000
Gross Profit	$  566,000	$  459,000
Operating Expense	376,000	277,000
Operating Income	$  190,000	$  182,000
Other Expense (interest)	15,000	12,000
Earnings Before Income Tax	$  175,000	$  170,000
Income Taxes	66,000	71,000
Net Income Earnings per share    2018 = $ 4.00 2017 = $3.50	$  109,000	$   99,000
Dividends Paid	48,000	42,000
Net Increase in Retained Earnings	$   61,000	$   57,000

Balance sheet Data                                                          Acct 742 Final page 12
Assets	2018	2017
Cash	$   30,000	$ 10,000
Receivables (net)	130,000	90,000
Inventory	170,000	113,000
Land, Buildings, and Equipment (net)	650,000	547,000
Intangible Assets	20,000	20,000
	$1,000,000	$780,000
Liabilities and Stockholders' Equity	2018	2017
Trade Notes and Accounts Payable	$ 100,000	$ 40,000
Miscellaneous Current Liabilities	50,000	11,000
5% Bonds Payable	300,000	240,000
Common Stock, $10 Par	100,000	100,000
Additional Paid-In Capital	51,000	51,000
Retained Earnings	399,000	338,000
	$1,000,000	$780,000
Continued on next page
Market price of stock end-of-each year repsecitively:                         $81    $68	Acct 742 Final page 13

1. compute profit margin just for 2018

2. compute asset turnover just for 2018

3. compute return on assets just for 2018 using the DuPont method

4. What is the price/earnings ratio at the end of 2018

Answer 1

a) Profit Margin for 2018:

Profit Margin = Net Income / Net Sales * 100

Profit Margin = 109,000 / 1,500,000 *100

                        = 7.27%

b) Asset Turnover for 2018:

Asset Turnover = Net Sales / Total Assets

                        = 1,500,000 / 1,000,000

                        = 1.5

c) Return on Assets using the Dupont Method for 2018:

Return on Assets = Profit Margin * Total Asset Turnover

Return on Assets = 7.27% * 1.5

Return on Assets = 10.905%

d) Price Earnings Ratio at the end of 2018:

Price Earnings ratio = Market Price of stock / Earnings per share

                                        = 81 / 4 = 20.25