A1_sol - ActSc 371: Assignment #1 Solutions Question 1 From...

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Question 1 From the balance sheets, we see that retained earnings decreased by $30.727 billion from 2004 to 2005. We know that the change in retained earnings should be equal to net income less dividends. The income statement shows that net income was $12.254 billion over the year, so this can’t explain the decrease. Examining the statement of cash flows we find dividends totalling $36.112 billion were paid over the year. Choosing “Dividends Only” from the Historical Prices list, we see a dividend of $3.08 per share was declared on November 15, 2004. This is very large compared to previous dividends of 8 and 16 cents per share. This massive dividend is the main reason for the large drop in retained earnings. Note: Net income less dividends here is equal to -$23.858 billion, which is not exactly equal to the observed change in retained earnings. This is be- cause there are other ways that retained earnings may change (we will not worry about those at all in this course). However, the dividends were so large that they can explain most of the change in retained earnings. Question 2 (a) The numerator of ROE is net income, which is equal to pS , where S is sales. The denominator is equity. Using the balance sheet identity A = L + E and the debt-equity ratio D = L/E , we can express equity as E = 1 1 + D A = ST 1 + D where A represents assets. This means we can express ROE as ROE = pS (1 + D ) ST = p (1 + D ) T (b) g 0 = p (1 - d )(1 + D ) T
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A1_sol - ActSc 371: Assignment #1 Solutions Question 1 From...

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