PLP Corporation began operations on January 1, 1994. The initial investment by the owners was $100,000. The following information was extracted from the company’s records. Net Income December 31 December 31 Cost of Stockholders’ Equity Inventory Goods Sold 1994 $510,000 $100,000 1995 490,000 290,000 1996 515,000 315,000 1997 505,000 510,000 $200,000 $ 1,200,000 255,000 1,350,000 320,000 1,395,000 365,000 1,400,000 REQUIRED:

a. Compute the return on equity for each year. Has the company been effective at managing the capital provided by the equity owners?

b. Does the information about inventory and the cost of goods sold indicate any reason for the trend in return on equity? Support your answer with any relevant ratios.