The Lo-Gro Co. in 2010 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 = Net Income / Equity = 1,800,000 / 15,000,000 = 0.12 or 12%
Retained Earnings = Net Income * (1 - Dividend Payout Ratio) = 1,800,000 * (1 - 0.6) = $720,000. Therefore, the correct answer is D.