Question

Average Common Stockholders' Equity, Return on Stockholders' Equity Rebert Inc. showed the following balances for last year: January 1 December 31 Stockholders' equity: Preferred stock, $100 par, 8% $ 4,000,000 $ 4,000,000 Common stock, $3 par 3,000,000 3,000,000 Additional paid-in capital* 4,800,000 4,800,000 Retained earnings 4,000,000 4,250,000 Total stockholders' equity $15,800,000 $16,050,000 * For common stock only. Rebert's net income for last year was $3,182,000. Required:

1. Calculate the average common stockholders' equity. $

2. Calculate the return on stockholders' equity. %

Answer 1

1.

Common stockholders equity, beginning = Common stock + Additional paid-in capital + Retained earnings

= 3,000,000 + 4,800,000 + 4,000,000

= $11,800,000

Common stockholders equity, ending = Common stock + Additional paid-in capital + Retained earnings

= 3,000,000 + 4,800,000 + 4,250,000

= $12,050,000

Average Common stockholders equity = (Common stockholders equity, beginning + Common stockholders equity, ending)/2

= (11,800,000 + 12,050,000)/2

= 23,850,000/2

= $11,925,000

2.

Preferred dividend = Par value of preferred stock x Preferred dividend rate

= 4,800,000 x 8%

= $384,000

Return on Common stockholders equity = (Net income - Preferred dividend)/Average Common stockholders equity

= (3,182,000 - 384,000)/11,925,000

= 2,798,000/11,925,000

= 23.46%