Question

Stephen Hawkins, Inc., currently has a common stock $65,000 and retained earnings of $175,000. The firm is expecting the following net 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 return on equity for the 5-year period.

Answer 1

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	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%