Regarding Block 8, Alahtab.
Question 1 requires you to calculate the Return on Equity:
So,
g = b × ROE
b = 1 – Payout ratio = 1 – (48/120) = 0.6
ROE = Net income/Shareholders’ equity = 120/(800 + 159.3) = 12.5
The ROE is using the Net Income from 2013 and the Shareholders Equity from the SAME year. IE you include the retained earnings created during the financial year and not utilised for the purpose of returning Equity.
I thought that you calculate ROE using current years Net Income and Previous years equity (As you use this capital base to produce the net income). Is there a mistake in the mock or is my logic the problem?
Question 1 requires you to calculate the Return on Equity:
So,
g = b × ROE
b = 1 – Payout ratio = 1 – (48/120) = 0.6
ROE = Net income/Shareholders’ equity = 120/(800 + 159.3) = 12.5
The ROE is using the Net Income from 2013 and the Shareholders Equity from the SAME year. IE you include the retained earnings created during the financial year and not utilised for the purpose of returning Equity.
I thought that you calculate ROE using current years Net Income and Previous years equity (As you use this capital base to produce the net income). Is there a mistake in the mock or is my logic the problem?