Question

Mann Corporation decided to issue common stock and used the $120,000 proceeds to retire all of its outstanding bonds on January 1, 2017. The following information is available for the company for 2016 and 2017. 2017 2016 Net income $120,000 $100,000 Average stockholder's equity 1,000,000 800,000 Total assets 1,200,000 1,200,000 Current liabilities 100,000 100,000 Total liabilities 360,000 480,000 (a) Compute the return on common stockholders' equity for both years. (Round answers to 1 decimal place, e.g. 10.2%.) 2017 2016 Return on common stockholders' equity % %

Answer 1

Answer:

Return on equity in 2017 is 12% while that of 2016 is 12.5%

Explanation:

The formula for return on equity is given as net income/equity.

The net income is $120000 for 2017 and $100000 for 2016.

Shareholders' average equity is 1000000 shares in 2017 and 800000 shares in 2016.

                                                              2017                                  2016

Return on equity                            120000/1000000             100000/800000

Return on equity                             0.12                                     0.125

The return on equity is 12.0% in 2017 and 12.5% in 2016.

From all indications, the issue of additional shares to the tune of $120000  lead to a reduction in return on equity in 2017 by 0.5%