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Stephen Hawkins, Inc., currently has a common stock $65,000 and retained earnings of $175,000. The firm...

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Finance

Stephen Hawkins, Inc., currently has a common stock $65,000 andretained earnings of $175,000. The firm is expecting the followingnet income and dividends for the next five years.

Year

1

2

3

4

5

Net Income

$70,000

$85,000

$110,000

($30,000)

$30,000

Dividends distribution

(% of Net income)

40%

35%

50%

0

20%

Required:

Determine the Return on Equity for each year and average returnon equity for the 5-year period.

Answer & Explanation Solved by verified expert
3.8 Ratings (537 Votes)

let me know if you need any clarification..

Year 1 2 3 4 5 Total
i Net Income $70,000 $85,000 $110,000 ($30,000) $30,000
ii Dividends distribution 40% 35% 50% 0 20%
(% of Net income)
iii Common stock 65000 65000 65000 65000 65000
iv Beginning retained earning 175000 $217,000 $272,250 $327,250 $297,250
v=i*(1-ii) Net income added to retained earning $42,000 $55,250 $55,000 ($30,000) $24,000
vi=iv+v ending retained earning $217,000 $272,250 $327,250 $297,250 $321,250
vii=iii+iv Beginning share holder equity 240000 282000 337250 392250 362250
viii=i/vii return on equity 29.17% 30.14% 32.62% -7.65% 8.28% 92.56%
Average ROE = 92.56%/5 18.51%
therefore answer -
Return on Equity for each year
Year 1 2 3 4 5
ROE 29.17% 30.14% 32.62% -7.65% 8.28%
average return on equity for the 5-year period 18.51%
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