Settles Corporation has provided the following financial data: Dividends on comm

Question

Settles Corporation has provided the following financial data:

  

Dividends on common stock during Year 2 totaled $5,400. The market price of common stock at the end of Year 2 was $5.89 per share.

The company's return on equity for Year 2 is closest to:

50.52%

3.31%

5.09%

8.50%

Balance Sheet
December 31, Year 2 and Year 1 Assets Year 2 Year 1 Current assets:      Cash $142,000 $110,000      Accounts receivable      104,000 120,000      Inventory          119,000 120,000      Prepaid expenses                   37,000           40,000 Total current assets       402,000 390,000 Plant and equipment, net                  717,000       720,000 Total assets   $1,119,000 $1,110,000      Liabilities and Stockholders' Equity Current liabilities:      Accounts payable         $156,000 $180,000      Accrued liabilities          84,000 70,000      Notes payable, short term                  66,000         60,000 Total current liabilities   306,000 310,000 Bonds payable        250,000       250,000 Total liabilities        556,000       560,000 Stockholders' equity:      Common stock, $4 par value    240,000 240,000      Additional paid-in capital-common stock         90,000 90,000      Retained earnings                233,000       220,000 Total stockholders' equity               563,000       550,000 Total liabilities & stockholders' equity      $1,119,000 $1,110,000

Explanation / Answer

Average equity=(Beginning equity+Ending equity)/2

=(563000+550,000)/2=$556500

Hence ROE=Net income/Average equity

=(18400/556500)

=3.31%(Approx)

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