Question

Company X went public at the start of 2017. At the time of the IPO the company:

 Issued 200M shares of stock at $25 per share (thus raising $500M in equity)

 Issued $400M of long term debt; as part of this interest only loan, the company agreed to pay creditors 15.0% per year; this implies the current portion of long term debt is $0 in 2017/2018

At the end of 2017, Company X issued financial statements. A complete summary is below:

 $400M in sales, $260M in operating earnings, and $160 in net income

 $500M Gross PPE , $450 Net PPE  Working Capital of $430, excluding marketable securities  The company paid a dividend of 30 cents per share

 Investors were pleased with the results; Company X’s share price closed at $28 per share

At the end of 2018, Company X issued financial statements. A complete summary is below:

 $480M in sales, $300M in operating earnings, and $200 in net income

 $600M Gross PPE , $490 Net PPE  Working Capital of $460, excluding marketable securities

 The company paid a dividend of 40 cents per share  Investors were pleased with the results; Company X’s share price closed at $33 per share

Throughout 2017 and 2018:

 The company did not issue or repurchase any shares of stock other than during the IPO

 The company did not issue or retire any long term debt other than during the initial debt offering

20. In 2017, Company X’s Return on Equity, where ROE=NI/EOY SE, is closest to:
a. 20%

b. 23%

c. 25%

d. 27%

e. 33%

Answer 1

20) Return on equity= net income 2017/ end of year shareholder equity
=160/500
=32%
Since it is asking closest answer it is 33% option E