Jones Corp. Use this information to answer the following questions:
At the end of 2005 Jones Corp. developed the following forecasts of net income:
Management believes that after 2010 Jones will grow at a rate of 7% each year. Total common shareholders' was $112,768 on December 31, 2005. Jones has not established a dividend and does not plan on paying dividends during 2006 to 2010, its cost of equity capital is 12%.
What would be Jones' common shareholders' equity at the end of 2009?
A) $180,909
B) $208,161
C) $95,540
D) $112,768

Question

Jones Corp. Use this information to answer the following questions:
At the end of 2005 Jones Corp. developed the following forecasts of net income:
 Management believes that after 2010 Jones will grow at a rate of 7% each year. Total common shareholders' was $112,768 on December 31, 2005. Jones has not established a dividend and does not plan on paying dividends during 2006 to 2010, its cost of equity capital is 12%.
What would be Jones' common shareholders' equity at the end of 2009?
A) $180,909 
B) $208,161 
C) $95,540 
D) $112,768

Quizplus · Accepted Answer

To calculate the common shareholders' equity at the end of 2009, we need to add retained earnings for each year from 2006 to 2009.

Retained earnings at the end of 2006 = $85,000 - $20,307 = $64,693
Retained earnings at the end of 2007 = $94,400 - $24,563 = $69,837
Retained earnings at the end of 2008 = $103,616 - $28,169 = $75,447
Retained earnings at the end of 2009 = $113,186 - $32,137 = $81,049

Common shareholders' equity at the end of 2009 = Total common shareholders' equity on December 31, 2005 + Sum of retained earnings from 2006 to 2009
= $112,768 + ($64,693 + $69,837 + $75,447 + $81,049)
= $403,794

Therefore, the correct answer is B.