ZAX Limited has 2,500,000 common shares trading at $7.00 per share. The required rate of return on the firms common shares is 12%. The firm reported the following statement of shareholders equity in its most recent annual report. Dividends paid consisted of $120,000 in common dividends and $80,000 in preference dividends. ($ thousands) Common Stock Preferred Stock Reinvested Earnings Accumulated Other Comprehensive Income Total Shareholders Equity December 31, 2015 2,400 180 5,500 1,100 9,180 Net income 980 980 Foreign currency Translation gain/loss (20) (20) Other comprehensive income 30 30 Total comprehensive income 980 10 990 Dividends (200) (200) Common stock issued 80 80 Preferred stock issued 25 25 December 31, 2016 2,480 205 6,280 1,110 10,075

Required: (a) Reformulate the statement to show beginning and ending common shareholders equity, total net transactions with common shareholders and comprehensive income available to common shareholders. (7 marks)

(b) Analysts are forecasting earnings per share of $0.50 and $0.70 for ZAX Limited for each of the next two years respectively. Assuming a dividend payout ratio of 20%, calculate residual earnings for the next two years and the implied growth rate in residual earnings consistent with the forecasts. (6 marks)