1. Suppose during the year a company makes a profit selling perfumed underwear a
ID: 2420913 • Letter: 1
Question
1. Suppose during the year a company makes a profit selling perfumed underwear and retains some of its earnings. Next year it sells exactly the same amount, at the same costs per unit, same fixed costs, etc. What is its ROE for the second year compared to the first?
A. higher
B. lower
C. the same
D. not enough information to give answser
2. Which of the following payments that a business makes is NOT “contractual” ("contractual" means must pay otherwise go bankrupt)?
A. wages to labor
B. electricity use
C. interest on debt
D. Preferred stock dividend
Explanation / Answer
1) ROE=Net Income/ Shareholder Equity
Current yera= Yera 1
Next year= Year 2
Now suppose in the year 1 the company has made profits and retained some of its earning that means the shareholder equity have been incresed by reatined earnings.
In year 2 if net income is same and nothing is retain that means all is distributed that there will be no change in ROE but if some earnings are retained than again the shareholder equity (denominotor) will increase there by decresing the ROE.
Please dont post multiple questions. I have answered first.
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