Question

Jerry Rice and Grain Stores has \(4,780,000 in yearly sales. The firm earns 4.5 percent on each dollar of sales and turns over its assets 2.7 times per year. It has \)123,000 in current liabilities and $349,000 in long-term liabilities.

a. What is its return on stockholders’ equity?

Short answer

The return on the stockholder’s equity is 16.57%.

Step-by-step solution

Net Income

$\begin{array}{rcl}\mathrm{Net}\mathrm{income}& =& \mathrm{Sales}\times \mathrm{Profit}\mathrm{margin}\\ & =& \$4,780,000\times 4.5\%\\ & =& \$215,100\end{array}$

Total assets

$\begin{array}{rcl}\mathrm{Average}\mathrm{total}\mathrm{asset}& =& \frac{\mathrm{Net}\mathrm{sales}}{\mathrm{Total}\mathrm{asset}\mathrm{turnover}\mathrm{ratio}}\\ & =& \frac{\$4,780,000}{2.7}\\ & =& \$1,770,370\end{array}$

Shareholder’s equity

$\begin{array}{rcl}\mathrm{Shareholder}\text{'}\mathrm{s}\mathrm{equity}& =& \mathrm{Total}\mathrm{asset}-\mathrm{Current}\mathrm{liability}-\mathrm{Long}\mathrm{term}\mathrm{liabilities}\\ & =& \$1,770,370-\$123,000-\$349,000\\ & =& \$1,298,370\end{array}$

Return on equity

$\begin{array}{rcl}\mathrm{Return}\mathrm{on}\mathrm{shareholder}\text{'}\mathrm{s}\mathrm{equity}& =& \frac{\mathrm{Net}\mathrm{income}}{\mathrm{Shareholder}\text{'}\mathrm{s}\mathrm{equity}}\\ & =& \frac{\$215,100}{\$1,298,370}\\ & =& 16.57\%\end{array}$