The Lo-Gro Co. in 2014 had equity of $15 million, net income of $1,800,000 of which 60% was paid out as dividends. The ROE and retained earnings for the Lo-Gro Co. are:
A) 1.2%; $720,000.
B) 4.8%; $720,000.
C) 12%; $1,080,000.
D) 12%; $720,000.

Question

Quizplus · Accepted Answer

ROE is calculated as Net Income / Equity. For Lo-Gro Co., this is $1,800,000 / $15,000,000 = 0.12 or 12%. Retained earnings are the portion of net income not paid out as dividends, which is 40% of $1,800,000 (100% - 60% = 40%), equaling $720,000.